Coffee and cocoa: the wheel of fortune turns for the international markets
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CTA. 1994. Coffee and cocoa: the wheel of fortune turns for the international markets . Spore 50. CTA, Wageningen, The Netherlands.
Permanent link to this item: http://hdl.handle.net/10568/49341
1992 will go down in history as the worst year since World War II for the prices of coffee and cocoa, two major tropical agricultural exports. But 1993 will be remembered for the spectacular come-back in price levels and a fundamental restructuring...
1992 will go down in history as the worst year since World War II for the prices of coffee and cocoa, two major tropical agricultural exports. But 1993 will be remembered for the spectacular come-back in price levels and a fundamental restructuring of the world markets for the two commodities. The fluctuation in coffee and cocoa prices has not yet ended. It looks set to continue during 1994 and perhaps beyond, before finally halting the drama of the late eighties which left the economies of the producer countries reeling. The reason for this crisis was an imbalance between supply and demand. New producers, mainly from South-east Asia, have appeared on the scene, causing a sharp increase in world production; and at the same time, there has been stagnation, or even a reduction, in the purchasing power of the consumer countries, leading to a market setback. During the past decade stocks of coffee and cocoa started to accumulate all over the world and prices spiralled downwards. The protective barriers, which had operated under international agreements, crumbled world-wide under the pressure of market forces. Prices went into free fall, regulated only by the laws of supply and demand (see box, 'Stocks and quotas'). In July 1989 clashes between Brazil and Central America led to the breakdown of the agreement on coffee, while the cocoa agreement was made inoperable because the International Cocoa Organization (ICCO) no longer had the financial resources to fulfil its mandate of stockpiling when prices fell too low. Left without their regulating bodies, the coffee and cocoa markets continued their steep decline towards the rock bottom point reached in 1992. In August 1993 coffee was trading in New York at 46c per pound, compared to 204c/lb at its 1986 peak; and in 1992 cocoa was trading on the London market at under \9C550/tonne, one-quarter of the 1984 price. However, by August 1993 the tide had turned and, although the peak prices of the mid 1980s have still not been reached, coffee has regained 75% of its value and cocoa 100%. Keeping supply under control The current rise in coffee prices has been brought about by a change in policy on the part of the exporting countries, who came to the decision that solidarity was the only way out of the crisis. By April 1993 the chances of reviving the international agreement which had been suspended in 1989 were fading fast. At that point Brazil and Colombia, the two main world producers of Arabica, announced that they would be coordinating their policy in order to limit supply on the international market. Their plan vvas immediately approved by the Central American producers of top-of-therange Arabica. At one stroke this made 75% of the world supply of Arabica subject to a single coordinated commercial policy. In theory at least, the producer countries had gained control over the market situation. In August of that year the African producer countries decided to join the Latin-American plan which thus became fully viable. This decision must have sounded like an ultimatum to the consumer countries but was justified by the Cote d'lvoire Minister of Commodities, Guy-Main Gauze, in these terms: 'Our earnings from the producer countries have dropped from an annual average of $12 million, when the market was fixed, to $6 million per annum since deregulation. And this is despite a 30% increase in the amount of imports.' Once Africa had joined the plan to withhold supply, 85% of world supply was committed. The coffee producers' new policy was adopted at a top level meeting in Kampala, Uganda, on 15-16 August 1993, and became known as the 'Kampala Plan'. This agreed a 20% reduction of coffee exports in order to raise prices. The Association of Coffee-Producing Countries (APPC), an ad hoc organization created for the purpose and including all the signatories of the Kampala Plan, undertook its implementation, and the group's activities are being coordinated by Brazil (on behalf of Latin America) and C'te d'Ivoire (for Africa) The system which existed in the days of the agreement would be replaced by a withholding of supplies, similar in some respects to the system which operated under the international cocoa agreement. The crucial difference is that the coffee plan originated solely with the participation of producer countries, and no part at all was taken by the consumers. This has provoked accusations that the producers are operating a cartel, rather like OPEC does with oil. However, the producers insist that they are not creating an artificial shortage but merely trying to raise the price of coffee to an acceptable level, comparable to that before the breakdown of the previous agreement. Furthermore, the withholding of stocks is intended to operate only within well-defined price parameters, as for the ICCO cocoa buffer stock. This plan took effect from I October 1993, the day the international coffee agreement lapsed. It was a clear warning to the consumer countries that the market would be controlled without them, since they were not prepared to extend the agreement. For the first time since the dark days of July 1989, which had revealed their differences, the producer countries seemed to be succeeding in operating a common policy in order to save their coffee economy. During the three years of the free market (between the breakdown of the agreement and the enforced ending of the quota system) the exporting countries had imagined that they could compensate for the drop in prices by an increase in exports. Ultimately they have realized that this is not so, and they have learned a valuable lesson. The consumer countries have also understood the message. Whereas even in July, 1993 people in the coffee trade were still saying there was no need to worry about short-term supply, they are now revising their forecasts. One dealer in Le Havre, admitting his error at that time, said in September of the Brazilian market, which is the top world exporter: 'At the current rate of supply there will begin to be a scarcity from January 1994 onwards.' The impact of the plan is all the greater because it has coincided with a return to the true balance between supply and demand. In Africa the effects of the free fall in prices since 1986 are beginning to show up in production. Growers are cutting back on costs: the plantations are not so well maintained; insecticide and fertilizer use has been drastically cut back, and yields have therefore decreased. Where growers can find a viable alternative they are abandoning coffee. In Cameroon the next generation of growers is replanting the land they inherit with market garden crops. Meanwhile, in Brazil a million old and unproductive bushes, equivalent to a quarter of the planted area were pulled up between 1 990 and 1 993, and the land has remained uncropped. Lower production Observers of the coffee trade are concerned, not just because of the withholding of supplies, but because of the production figures for 1993-94. On-going analyses of the trends confirm a drop in production. For the second year running the Brazilian harvest has fallen to 23 million bags, a reduction of seven million on the preceding years. C'te d'lvoire has announced a drop of 40% explained by its government by 'the demotivation of planters by continuing low prices.' Suddenly everyone is talking about a coffee shortage, and the policy of withholding supplies from the market in order to maintain prices may not now be quite so necessary. At the end of last November a member of the coffee trade said at the annual convention of coffee merchants 'World consumption is approaching 92 million bags. The balance is precarious and, whatever people say, prices are low. If in the coming weeks European and American stocks run down and production figures are still being revised downwards, the policy of withholding, which has come in for so much criticism, will be redundant. Consumers must keep a careful watch on changes in supply, and pick up on any temporary imbalances between supply and demand. ' Carte blanche for cocoa The cocoa market has also been going up in recent months, helped by the major market indicators (balance of supply and demand, and existing stocks). Breaking through the psychological barrier of \A31000/ tonne, cocoa has regained its price of five years ago when the international agreement was still in force. After seven years of surplus the cocoa market experienced a supply deficit in 1991-92 and again in 93-94, caused by drought in Brazil, cyclones in Indonesia and Malaysia, and disease in Africa. The effect of these natural disasters has been exacerbated by the vulnerability of the plantations, which are less well maintained and protected than hitherto. However, although there may be a deficit, it has not yet reached alarming proportions. During the long years of overproduction, the buffer stock intervened frequently in order to try and arrest the drop in prices. It now has a reserve of some 230,000t of beans, which it will have to release gradually in order not to upset the market. The 1993-94 harvest, according to the dealer E F Man, who is an authority on cocoa statistics, resulted in a 200,000t deficit - more than twice that of the 96,000t deficit of the previous season. This figure has confirmed previous forecasts, which have been worrying the trade and, since July 1993, prices have started to rise again. As in the case of coffee this reversal of the basic trend in the balance between supply and demand has been accompanied by a change, in itself of equal significance, in the relationship between consumer and producer. This now provokes the name 'cocoa OPEC' because of the decision taken at the end of November by the 13 members of the Cocoa Producing Alliance (COPAL) to adopt a voluntary quota in order to limit exports and support prices. The epithet is scarcely justified because the decision was taken with the tacit agreement of the consumer countries. In point of fact, unlike the case of coffee, the agreement on cocoa did not entirely lapse, but the new agreement signed in July 1 993 allowed the exporting countries to control the market themselves by a limitation of exports. The cocoa producers, therefore, have an entirely free hand and all that remains is to keep a close check on how well the policy is working. This removes the need for the consumer countries to finance an expensive buffer stock, as has been the case up till now. The fragile balance which is beginning to make its effects felt on the international cocoa market is, however, seriously threatened by a proposal, instigated by the UK, Ireland and Denmark, to permit wider use of vegetable fats in chocolate manufacture within the EC. These fats, mainly soya or palm oil, are ten times cheaper than cocoa butter. The proposal is being vigorously supported by the oleaginous (palm and soya) lobby, as it would provide them with a new market, and by the chocolate manufacturers who see an opportunity of cutting production costs. Such a move would reduce (by perhaps as many as 200,000t/pa) the world demand for cocoa, not to mention the adverse effect it would have on the taste and quality of the chocolate, and this would be enough to send prices sliding again. In both the coffee and cocoa markets the next few months will reveal whether the producers can succeed in their policy and stimulate a return to the upward price spiral after almost a decade of falling prices, or whether the current gain is just a momentary recovery in a long-term down ward trend. The producers, however, are bullish and in Africa, Cameroon and C'te d'lvoire have already raised the purchase price for the coming harvest.