Decades of poor agricultural planning and lack of regional coordination have caught up with most of the world#;s coffee producing nations. The supply of coffee has continued to expand in the face of overwhelming evidence of a growing international surplus. The inevitable result is depressed international prices. Spurred on by the world#;s leading coffee producing nation, Brazil, the Association of Coffee Producing Countries (ACPC) developed the existing scheme to withhold their product from international markets in an attempt to drive up prices.

At best, retention schemes should be viewed as a temporary means of bolstering international prices. It looks, however, as though Brazilian coffee exporters want to establish a permanent international coffee cartel along the lines of OPEC. Several basic flaws in the system portend failure in the medium to long term.

The cartel concept has proven only sporadically effective for the oil industry, which controls a commodity that is absolutely essential to our modern lifestyle. Thus the chance of a cartel achieving sustained price increases for non-essential commodities like coffee, bananas, and sugar is slim indeed. The greatest weakness in the cartel promoted by Brazilian exporters is its transparency; in other words, it does not disguise the reality of a major international surplus of coffee beans.

During the second week of February, Brazilian exporters proposed modifications to the recently implemented ACPC retention scheme. These proposals reveal some of the weaknesses in the program. For example, they proposed a system for changing ownership of coffee supplies while the beans are still being withheld from the market.

Small coffee dealers and exporters have already experienced difficulty in sustaining the cost of high inventories for long periods of time. The new proposal would allow them to sell coffee to other parties that would still be obligated to withhold the product. If this modification goes into effect, it sets the stage for desperation sales that are not healthy for the industry. It would position the largest and best capitalized exporters to buy out their weaker competitors at low prices, creating a situation where only the strongest exporters reap the benefit of retention.

Brazilian exporters also petitioned for help in overcoming their storage space problems. There simply is not enough warehouse space available to retain large amounts of coffee near the leading export centres. Adequate storage space was identified in the state of Parana, but exporters find it prohibitively expensive to ship their coffee beans to and from Parana#;s warehouses. The lack of viable warehouse space throws the viability of the entire plan into question.

“The cartel does not disguise the reality of a major international surplus of coffee beans”

Most coffee producing nations are making a costly mistake by espousing retention as a long-term trade strategy. By attempting to cure the serious disease of overproduction with the band-aid of retention, they are allowing underlying problems to fester. The governments of poor coffee producing nations are wasting money on subsidising and ultimately storing unneeded crops at a time when those funds could be dedicated to meeting much more urgent needs of their citizenry.

It would be a mistake for the governments of coffee producing nations to undercut the ACPC coffee retention program at this point. The program may temporarily bolster coffee prices. Nevertheless governments must be very careful not to institutionalise a coffee retention system. In other words, governments should avoid spending large sums of money on building storage facilities to be used for retaining coffee. Instead, that money must be channelled into assisting coffee farmers to discover and adopt alternative crops that are in greater demand on the international market.

By Steven Lewis, correspondent

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