The world

coffee market andthe international coffee agreement M.Th.A. Pieterse and H.j. Silvis

W a g e n i n g e n fg

Agricultural

University

1988

BIBLIOTHEEK. LANDBOUY< , UNIVERSITE!1 WAGFJ\TN£EN WAGhNlJN^KJN

/

CIP-GEGEVENS KONINKLIJKE BIBLIOTHEEK, DEN HAAG Pieterse, M.Th.A Theworldcoffee marketandtheinternationalcoffee agreement/M.Th.A.PieterseandH.J.Silvis Wageningen: Agricultural University. - III. - (Wageningen Economic Studies: 9) With ref. ISBN 90-6754-118-4 SISO 678.6 UDC [339.542: 663.93](I00) NUGI 689 Subject headings: coffee; international trade / coffee; international economic policies. No part of thispublication,apart from bibliographic dataandbrief quotations embodied in critical reviews,mayreproduced,re-recorded or publishedinanyform includingprint,photocopy, microform, electronic of electromagnetic recordwithout written permissionfrom the publisher Pudoc, P.O. Box 4, 6700 AA Wageningen, the Netherlands. Printed in the Netherlands

ABSTRACT

M . T h . A . Pieterse and H . J . Silvis The World Coffee Market and the International Coffee Agreement Wageningen, Pudoc, 1988 ( X

+ 105 p . , 27 t a b . , 10 f i g . )

Based on research done at t h e International Coffee O r g a n i z a t i o n , t h i s r e p o r t presents a d e s c r i p t i v e analysis of t h e world coffee m a r k e t .

The

emphasis is on t h e coffee p r i c e , which is studied from t h e angles of p r o d u c t i o n , consumption, t r a d e and t h e International Coffee Agreement. The Agreement - a commodity agreement operating w i t h e x p o r t quotas can be regarded as a consumer-supported p r o d u c e r s ' c a r t e l , o r i g i n a l l y dominated b y B r a z i l . Brazil's declining share of p r o d u c t i o n as well as of s t o c k s , has exacerbated t h e already d i f f i c u l t decision making on quotas and p r i c e s . The problems of t h e I C A , i n c l u d i n g t h e allocation of q u o t a s , t h e increase of t h e non-quota market as well as t h e shortfalls and u n d e r shipments, have hampered consensus among both producers and consumers. However, i t is expected t h a t p r o d u c i n g countries will t r y to regulate t h e m a r k e t , even in t h e absence of a consumer-supported agreement.

Coffee / International Coffee Agreement / Export quotas / Commodity Agreement / International a g r i c u l t u r a l t r a d e

PREFACE

Many people have c o n t r i b u t e d in one way or another to t h i s r e p o r t , which aims at c l a r i f y i n g t h e complex economical and political n a t u r e of t h e w o r l d coffee m a r k e t . We would like to t h a n k mr M. van de Steene of t h e I n t e r national Coffee Organization who most generously allowed t h e f i r s t author to f u l f i l a practical period at t h e ICO. Mr A . Rengifo and d r O. Akoto of the

ICO k i n d l y gave valuable time to discuss t h e various aspects of

coffee, and mrs K. Winchester of the ICO l i b r a r y was most helpful in making t h e l i t e r a t u r e accessible f o r r e s e a r c h . Mr H . F . van Leersum of t h e Netherlands Coffee T r a d e Association was so kind

as to make comments on an early d r a f t of t h e r e p o r t ,

while

d r A . van T i l b u r g of t h e A g r i c u l t u r a l U n i v e r s i t y made some useful s u g gestions. Our t h a n k s are due to mrs M. van H u n n i k f o r t y p i n g t h e m a n u s c r i p t , mr P. Holleman f o r d r a w i n g t h e g r a p h s and mrs M . C . Rigg f o r g r e a t l y improving the E n g l i s h . A l t h o u g h many people have c o n t r i b u t e d , the r e s p o n s i b i l i t y f o r t h e r e p o r t lies wholly w i t h t h e a u t h o r s .

September 1987,

M . T h . A . Pieterse H . J . Silvis

CONTENTS

£aae ABSTRACT

V

PREFACE

VII

1.

INTRODUCTION

1

2.

PRODUCTION

6

2.1

Introduction

6

2.2

Botany and ecology

2.3

Production systems and cost of p r o d u c t i o n

8

2.4

Volume and s t r u c t u r e of w o r l d p r o d u c t i o n

11

2.5

Marketing in p r o d u c i n g c o u n t r i e s : systems

2.6 3.

4.

6

and p r o d u c e r prices

16

Production characteristics

20

CONSUMPTION

24

3.1

Introduction

3.2

Volume and s t r u c t u r e of consumption

24

3.3

Processing

3.4

B a r r i e r s to e n t r y

29

3.5

Consumption characteristics

31

24 27

TRADE

34

4.1

34

Introduction

4.2 S t r u c t u r e of t h e w o r l d market 4.3

International marketing channels

4.4

Participants on t h e international coffee market

4.5

Market characteristics

34 36 38 40

5. THE INTERNATIONAL COFFEE AGREEMENT

45

5.1 Introduction

45

5.2 The International Coffee Agreement of 1983

46

5.3 History of international market interventions

57

5.4 Problems with the system of export quotas 5.5 Assessment 6. CONCLUSIONS LITERATURE APPENDIX

72 89 92 96 100

Historical survey of developments in global coffee production

100

1.

INTRODUCTION

Coffee is the most important tropical commodity in

international

agricultural trade. This report presents a descriptive analysis of the international coffee market and its regulation by the International Coffee Agreement ( I C A ) . The focus of attention is on the price of coffee. Many questions can be raised about this. What are its determinants? Which characteristics of supply and demand can explain its short term and long term development? What role is played by the International Coffee Agreement? How does this agreement regulate the market? With what success? What kind of problems are encountered? For which problems has a solution been found? The research on these questions was largely done at the International Coffee Organization (ICO) in London, where literature was researched in the extensive library, available statistics were collected and interviews were held with staff members and representatives of member countries. The findings of the research initially served as an M.Sc. thesis for Agricultural Economics and Policy (Pieterse, 1987). From an international perspective, production and consumption of coffee are clearly separated. Production is restricted to the (sub)tropical regions of the world, whereas consumption is concentrated in Western Europe, North America and Japan. A large number of exporting countries is heavily dependent on coffee for the foreign exchange earnings. In 1985, coffee exports constituted more than 25 percent of the total export revenues of sixteen countries (see table 1.1). On the other hand, imports of coffee form only a minor share of the total value of imports of industrialized countries. However, in these countries, coffee-drinking forms a very important element in the dominant lifestyle. Coffee prices on the international market tend to be very volatile. Apart from monetary factors that may destabilize commodity markets collectively, the coffee market has to cope with cyclical imbalances between supply and demand and with occasional harvest failure. A frost in Brazil,

Table 1 . 1 . E x p o r t value of coffee as a percentage of total e x p o r t s f o r selected countries in 1985. Brazil

10.3

Cameroon

29.0

Colombia

50.9

Madagascar

38.2

Cote d ' I v o i r e

24.7

Burundi

96.6

Haiti

29.2

Indonesia

2.9

Costa Rica

33.5

Rwanda

66.21

El Salvador

73.0

Sierra Leone

22.1

Guatemala

41.4

Uganda

94.2

Honduras

24.4

Central A f r i c a n Republic

45.8

Kenya

31.3

Nicaragua

41.4

Tanzania

38.4

India

3.1

Ethiopia

49.8

Mexico

2.5

Benin

55.5

1

1984 f i g u r e .

Source: ICO, Q u a r t e r l y Statistical B u l l e t i n 36, 1986. the main p r o d u c i n g c o u n t r y , can have a considerable impact on total supply.

T h i s can lead to large price r e a c t i o n s , often aggravated b y

speculative behaviour on t h e f u t u r e s m a r k e t .

i

The stabilization of coffee prices is t h e prime objective of t h e I n t e r n a -

tional Coffee Agreement ( I C A ) . T h i s p r o d u c e r and consumer based agreement was f i r s t established in 1962 and was renewed in 1968, 1976 and 1983. With a number of i n t e r r u p t i o n s , t h e ICA has regulated t h e w o r l d coffee t r a d e b y means of e x p o r t quotas which r e s t r i c t members' e x p o r t s to i m p o r t i n g member m a r k e t s . C u r r e n t l y t h e agreement covers 99% of p r o d u c tion and some 85% of global consumption. The ICA numbers s e v e n t y - f i v e member c o u n t r i e s , f i f t y p r o d u c i n g countries and t w e n t y - f i v e consuming countries. A l t h o u g h t h e Coffee Agreement has certain unique f e a t u r e s , i t is not the only

international commodity agreement.

In t h e 1947 C h a r t e r

of

Havana, t h e members of t h e United Nations agreed to s t r i v e f o r i n t e r n a tional commodity agreements between p r o d u c i n g and consuming c o u n t r i e s .

Figure 1 . 1 . Schematic representation of t h e s t r u c t u r e of t h i s r e p o r t .

CHAPTER1 INTRODUCTION

CHAPTER4 TRADE

CHAPTER2

CHAPTER 3

PRODUCTION

CONSUMPTION

INTERNATIONAL COFFEE AGREEMENT CHAPTER5

CONCLUSIONS CHAPTER 6

' The objective was to reduce commodity p r i c e v o l a t i l i t y . A n important reason f o r t h i s was to help developing c o u n t r i e s , which had to cope w i t h severely f l u c t u a t i n g e x p o r t e a r n i n g s . T w o systems of p r i c e stabilization were d e s c r i b e d . S u p p l y was t o be c o n t r o l l e d either b y e x p o r t quotas or b y a b u f f e r stock agreement, while still allowing market forces to w o r k in t h e f r e e s t possible sense. Regulation was only allowed when t h e balancing of s u p p l y could not be effectuated b y normal market forces alone. Agreements were to aim at a reasonable degree of price s t a b i l i t y on t h e basis of such prices as were f a i r to t h e consumer and remunerative f o r t h e e f f i c i e n t p r o d u c e r , and expansion of p r o d u c t i o n was to take place b y t h e most e f f i c i e n t p r o d u c e r . Commodity agreements were meant to stabilize, not to increase p r i c e s . Increases in income f o r e x p o r t i n g countries were to be reached via g r o w t h in demand. Voting r i g h t s in t h e commodity organizations were to be d i s t r i b u t e d equally among p r o d u c e r s and consumers. A n d f i n a l l y , t h e agreements were to be j o i n t l y a d m i n i s t r a t e d . The framework p r o v i d e d b y t h e C h a r t e r of Havana has led to a number of agreements of which t h e most important are f o r wheat, s u g a r , t i n , r u b b e r , cocoa and coffee.

In 1964 t h e specific t a s k of promoting and

o r g a n i z i n g commodity agreements was taken up b y t h e newly established U n c t a d , which was to p r o v i d e a platform f o r t h e debate on relations between developed and developing c o u n t r i e s . In 1976 in t h e search to establish a Common F u n d , t h e I n t e g r a t e d Program f o r Commodities was proposed. T h i s f u n d was to serve as a basis f o r t h e f i n a n c i n g of b u f f e r stock activities f o r t e n 'core' (most i m p o r t a n t ) commodities. However, t h i s proposal f o r t h e benefit of developing countries has s t i l l not been r a t i f i e d b y t h e i n d u s t r i a l i z e d c o u n t r i e s . T a k i n g into consideration t h e changes in the

international

political

appreciation

of

commodity

agreements,

the

Integrated Program must t h e r e f o r e be considered a f a i l u r e . The o n l y t h r e e major commodity agreements, c u r r e n t l y f u n c t i o n i n g are those f o r cocoa, r u b b e r and coffee. The T i n Agreement collapsed in 1985 because of financial problems, and t h e Sugar Agreement, o p e r a t i n g w i t h e x p o r t q u o t a s , was not renewed in 1984 because its coverage of t h e w o r l d market was too small. The Cocoa and t h e Rubber Agreements both operate b y means of a b u f f e r s t o c k . T h e Rubber Agreement was f i r s t established

in 1979. The Cocoa Agreement is much older. In 1986 its members decided on a fourth agreement. With the exception of the United States, all important producing and consuming countries are members. 'At the moment, the Coffee Agreement is the only international commodity agreement that operates through export quotas. This statement needs some qualification, in that, at the time of writing, the member countries have not been able to decide whether to implement the quotas or not in spite of low coffee prices. This issue is dealt with in Chapter four. The structure of the report is quite simple. A schematic representation of the structure is given in Figure 1.1. This shows that the main focus is on the price of coffee. In the next four chapters, this price is studied from the angles of production, consumption, trade and the Coffee Agreement. Chapter Two reviews the characteristics and historical developments of production and marketing. Chapter Three is devoted to consumption and processing of coffee in the industrialized countries. The bridge between production and consumption is formed by international trade, and Chapter Four describes the actors and channels via which this trade is conducted. Many elements of production, consumption and trade are helpful in the analysis of the International Coffee Agreement, as is seen in Chapter Five which explains how the Agreement is operated. There is also a review of international interventions in the coffee market. The evolution of the Agreement to its present form is marked by the problems which were encountered in these undertakings. Disputes between members of the Agreement are analyzed and the chapter concludes with an assessment. Finally, in Chapter Six the conclusions of this study are summarized.

PRODUCTION

2.1

Introduction

How do production and marketing in producing countries determine world coffee prices? How do world market prices of coffee influence production and marketing in these countries? These questions form the subject of this chapter. A survey of the botany and ecology of the two main types of coffee, and the areas of the world where they are cultivated, is followed by a brief analysis of production systems and production costs. Next the volume and structure of world production are discussed, and the marketing systems in producing countries are described, with special attention to the three predominant organization forms. Hereafter the relation between world market prices and producer prices is analyzed. Finally there is a discussion of short and long term production characteristics of coffee.

2.2 Botany and ecology Coffee is a tree crop. The f i r s t harvest is about three to four years after planting and it takes two to three years more before the tree reaches its normal yield. Yields normally start to decline about fifteen years after planting, but under good management, the drop in production is not rapid, and the tree can have an economic life of up to f i f t y years. The quality of the coffee can vary greatly. This is not only because of the type of coffee but is also caused by natural conditions and methods of handling and processing. The two main types of coffee are Arabica and Robusta, and production areas are determined by the different climatic requirements of the two species. Arabica is responsible for 78% of world production. It is an upland species, requiring an average annual temperature of between 18-25°C,

w i t h minimum temperatures around "13°C and maximum temperatures not exceeding 30°C. On t h e equator Arabica is f o u n d between 1700 and 2500 m, b u t in B r a z i l , at a latitude of 2 4 ° , i t

can be g r o w n at an a l t i t u d e of

o n l y 100-200 m. Arabica is v e r y susceptible to f r o s t s , which can damage not only t h e c u r r e n t c r o p , b u t also f u t u r e crops if t h e t r e e itself is affected.

Arabica

needs a rainfall

of 1500-2500 mm well

distributed

t h r o u g h t h e year w i t h a d r i e r period of two to t h r e e months (De G r a a f f , 1986; p. 2 9 ) . In low rainfall areas, i r r i g a t i o n is r e q u i r e d or arrangements need t o be made to conserve soil moisture. Too much rainfall is more easily t o l e r a t e d . The t r e e is r a t h e r susceptible to diseases (leaf r u s t ) which

necessitates

spraying

with

herbicides.

Often

shade trees

are

planted to conserve a certain stable microclimate, b u t at h i g h e r altitudes w i t h intensive c u l t i v a t i o n and optimum i n p u t s , higher yields are obtained w i t h o u t shade. Arabica conditions are p a r t i c u l a r l y well met in Central America, in c o u n t r i e s along t h e A n d e s , in some p a r t s of B r a z i l , and some areas in East A f r i c a and Madagascar. Only a few areas in Asia ( f o r example India and Indonesia) possess t h e r e q u i r e d c o n d i t i o n s . What is remarkable is t h e low s u i t a b i l i t y of large (especially s o u t h e r n ) areas in B r a z i l , which results in periodic crop f a i l u r e s . Robusta is t h e second major t y p e of coffee, w i t h 22% of w o r l d p r o d u c t i o n . T h e t r e e shows a wider a d a p t a b i l i t y than A r a b i c a , b u t t h r i v e s best under warm equatorial climates w i t h an average temperature fo 24-26°C. It grows best at lower altitudes (300-800 m ) , and r e q u i r e s a h i g h rate of h u m i d i t y all t h e year r o u n d . Optimum rainfall of 1700 mm, v a r y i n g between 1000 and 2500 mm/year should be well spread over 9-10 months. The Robusta coffee t r e e is h a r d i e r than A r a b i c a , b u t i t s u f f e r s from root r o t , which is d i f f i c u l t to c o n t r o l . A major pest is t h e coffee b e r r y b o r e r , and can affect the b e r r i e s even after d r y i n g . Shade trees are planted to avoid extreme ecological conditions such as too much or too l i t t l e sun and h u m i d i t y (De Graaff, 1986; p . 2 9 ) . Suitable zones f o r Robusta are f o u n d over large areas of West A f r i c a , t h e lower regions of Central and South America and t h e Caribbean as well as large p a r t s of South East A s i a .

2.3 Production systems and cost of production Systems of coffee production are very diverse, ranging from large estates to smallholder units. In Brazil, coffee is mainly produced by large specialized coffee estates, 47% of its production coming from farms larger than 100 ha (De Graaff, 1986; p. 112). In Africa, coffee is mainly produced by diversified smallholders, with an average farm size of 2 ha. In the other Latin American countries medium sized holdings between 5 and 30 ha predominate. A survey of the average yield and farm size of coffee producers in the world is presented in Table 2 . 1 . In many countries however, there exists a dual production structure of large estates with high yields, high input cost production next to smallholdings with low cost production. In Africa there is a tendency for smallholder production to increase in importance, and this is reflected in a declining output share of estate production. In Zaïre, Kenya and Tanzania, for example, plantations used to be more important (Dinham and Hines, 1983; p. 54), but new production units are predominantly set up by small farmers. For production factors and inputs, material inputs have become i n creasingly important, especially for intensively cultivated Arabica. However, the most prominent production factors in coffee production are still land and labour. The two factors are combined in varying ways according to their relative scarcity. Whereas smallholder production is typically labour intensive, estate production in Brazil is labour extensive and seasonal labour is hired during harvest periods. Material inputs (fertilizer, pesticides) are rarely used by African smallholders. Mechanization has taken place in estates in Brazil, where tractor inputs are used for land preparation and mechanical harvesting takes place by means of tree shaking. Labour requirements for harvesting usually constitute half of the total labour input (De Graaff, 1986; p. 77). Cultivation practices are largely determined by rainfall. In areas of low rainfall either mulching (by smallholders) or supplementary irrigation is required. In areas with high rainfall, weed control is a major activity, requiring considerable labour inputs or herbicides.

Table 2 * 1 .

Average yield and farm size of coffee producers in the world

(1979-1980). Yield

Size of

A p p r o x . area

(kg/ha)

plantation

under small

(ha)

holdings (%)

World

540

S. America

600

6

Brazil

600

11

n.a.

Colombia

700

4

n.a.

Ecuador

350

4

n.a.

Peru

600

3

90

750

3

n.a.

Costa Rica

1100

3

n.a.

El Salvador

1100

6

60

700

15

20

C. America

Guatemala Haïti

300

1

99

Mexico

600

4

70

350

2

90

Angola

200

30

10

Cameroon

400

3

90

Ethiopia

300

0.2

95

Africa

I v o r y Coast

350

2

95

Kenya

700

0.5

70

Madagascar

400

1

90

Rwanda

700

0.1

99

Uganda

500

0.5

95

Zaire

350

5

30

700

3

70

India

700

3

n.a.

Indonesia

600

0.5

80

Asia and Oceania

1

n.a.1

Philippines

1100

4

60

Papua New Guinea

1000

5

50

n.a. - not applicable: no clear cut difference between large and smal farm sectors. Source: De Graaff, 1986; p. 33.

10

These inputs can be avoided by interplanting with annual crops or by growing the coffee shrubs under shade trees (bananas). Most coffee farmers are usually diversified, as labour requirements for coffee show distinct peaks. Smallholder production but also production on medium and large estates in Latin America are complemented by staple food production and, for larger farms, extensive crops or livestock production. Table %,2. ,Yield, average production cost and prices to growers, for selected countries, in 1982.

Country

Brazil Colombia

Yield1

Average cost

Average p r i c e

per k g 1

paid to g r o w e r per k g 2

(US $)

(US $)

600

1.20

1.38

800

1.70

1.74

1200

1.10

1.24

1100

1.95

2.89

600

1.30

2.89

700

1.20

2.62

Arabica

200

1.70

1.02

Robusta

400

0.90

1.02

I v o r y Coast

300

0.90

0.88

Indonesia

500

0.80

1.10

Costa Rica Kenya estates smallholders Rwanda Cameroon

1

De Graaff, 1986.

2

ICO QSB 36, 1986. It is difficult to assess average production costs for coffee. These can

\\t'

'N

be divided into the four main categories of labour, land, material inputs and other costs, including depreciation on equipment and an annuity on establishment costs. On average, labour accounts for at least half of the

11

p r o d u c t i o n costs. Establishment costs of a coffee plantation cannot be neglected, and also consist largely "of labour investments. For t h e f i r s t t h r e e to f i v e y e a r s , no yields are obtained from t h e t r e e s , whereas labour i n p u t s are r e q u i r e d f o r c u l t i v a t i o n . As labour costs are hard to measure, data on p r o d u c t i o n costs must be handled w i t h c a r e . In Table 2.2 some average cost f i g u r e s ,

estimated b y De Graaff, are p r e s e n t e d . These

f i g u r e s are compared w i t h t h e average p r i c e paid to t h e g r o w e r . From t h e f i g u r e s i t may not be concluded t h a t coffee p r o d u c t i o n is always a v e r y p r o f i t a b l e a c t i v i t y . De Graaff (1986; p. 81) concluded t h a t , in g e n e r a l , net r e t u r n s are low and in years of average and low p r î t e s , net r e t u r n s in several countries are i n s u f f i c i e n t f o r p r o p e r maintenance

Jand

2.4

reinvestment.

Volume and s t r u c t u r e of w o r l d p r o d u c t i o n

In recent years total world coffee p r o d u c t i o n has not g r e a t l y increased, as is indicated in Table 2 . 3 . Table 2 . 3 .

Total w o r l d p r o d u c t i o n of coffee, crop years 1978/79 to

1985/86.

Crop year

Total w o r l d p r o d u c t i o n (000 bags)

1978/79

81.438

1979/80

76.578

1980/81

99.192

1981/82

82.650

1982/83

94.664

1983/84

82.839

1984/85

96.757

1985/86

84.551

Source: ICO QSB 35, 1986.

12

P