Taming the coffee rollercoaster
The first ICA was a five-year agreement, lasting from 1963 to 1968, although the US Congress delayed ratification until 1965 for fear of the impact of higher coffee prices. Signed by all of the world’s major coffee consuming and producing countries, the ICA was a binding agreement managed by the ICO that limited all green bean exports to North America and Western Europe to a quota of just under 47 million bags. Of this quota, over 18 million bags were allocated to Brazil and over 6 million to Colombia, with the remainder divided among other coffee countries on the basis of each one’s previous export years. Approval of quota allocations and rules were determined through a voting system in which each group of countries, importing and exporting, were allocated 1,000 votes, and decisions had to be ratified by a two-thirds approval from each group. As the votes were based roughly on the overall size of exports or imports, Brazil and the United States were each granted 400 votes, giving each country veto power over any quota decisions. In addition, the ICA included certificate of origin requirements for all shipments; a quota exemption for countries with low coffee consumption such as Japan, China, and the USSR; and a stipulation of 90 days’ notice required from any country opting to withdraw from the agreement.
During the years of the ICA, several challenges emerged to its operation and effectiveness, some of which persisted whereas others were more or less successfully managed. The issue of “tourist coffees,” whereby beans were sold to countries exempt from the ICA at lower prices and then re-exported into participating countries to avoid the quota barriers, emerged as a persistent challenge to the ICA system. Another major issue was overproduction, which continued more or less apace, with world production in 1966 exceeding demand by a surplus of 87 million bags. And yet, despite this excess supply, new technologies, such as fertilizers and hybrid plants, were constantly increasing the productivity of the mostly wealthy planters that could afford them. The result was an irrational system wherein countless labor hours and resources were exerted growing millions of surplus coffee bags that no one wanted. In response, Brazil set about bulldozing and burning millions of older coffee trees, but overproduction remained a global problem for many decades to come.
Coffee states were more successful in negotiating new arrangements to deal with disputes about quota sizes and prices. In particular, countries with traditionally smaller volumes of exports complained that quota limits did not take into account their increased production, and countries with higher-quality coffee beans argued that the quotas unfairly restricted their prices and market growth. To allow for greater flexibility, the ICA quotas were revised with new target price ranges: quota increases were automatically triggered if world market prices rose above the target price range, and similarly automatically decreased if market prices dropped below the price range. In addition, the price range was now determined by a “selectivity principle” offering different prices for different qualities of coffee: Robustas (primarily from Africa and Indonesia at the time); unwashed Arabicas (dominated by Brazil); Colombian milds (Colombia and Kenya); and “other milds” (Central America).
The ICA was determined to have met the needs of coffee states enough to be renewed from 1968 to 1972. During the second ICA, disputes between exporting and importing states began to emerge over quotas and prices. In 1969, the price of Brazilian beans fell to 35 cents, just above the target price of 34 cents. Fearing the downward trend, nine major coffee exporters from Latin America and Africa met in Geneva, forming what became known as the “Geneva Group,” and formally requested lower quotas to boost prices. When prices rose abruptly the following year, up to over 50 cents, due to a frost and a drought in major coffee regions in Brazil, the simmering dispute was temporarily sidelined, and producing countries even agreed to raise the quotas to allay fears from the United States over the price spike. In 1971, matters heated up again when the United States abandoned dollar–gold convertibility and devalued the US dollar in response to the rising costs of the Vietnam War and a declining position in world trade. As coffee was traded internationally in US dollars, the effect of the devaluation was to dramatically reduce the real prices of coffee. When the United States rejected a request from coffee countries to lower ICA quotas to compensate for the devaluation, the members of the Geneva Group opted for a different form of coffee statecraft, deciding to collectively hold their beans off the market beyond the agreed terms of the ICA. This successfully raised prices, as well as the ire of the United States. With tensions mounting, the ICA expired without renewal at the end of 1972. The trading of futures contracts on the New York exchange rapidly took off, with speculators anticipating a return to more extreme price swings.
Despite mounting opposition among US politicians and policy makers to price regulation, the United States was compelled to sign a new ICA only four years later, in 1976. This decision was driven to a large extent by a rapid increase in coffee prices. From 1975 to 1977, the coffee composite indicator price more than tripled, soaring from 63 cents to $2.29 per pound. The price boom was driven by an unprecedented snowfall in Brazil in 1975, the “Black Frost,” which destroyed almost the entire national harvest for the year, as well as a combination of unrelated political and environmental events throughout the coffee world, from civil wars and labor unrest, to flooding in Colombia, an earthquake in Guatemala, and a coffee leaf rust outbreak in Nicaragua. Under these conditions, prices skyrocketed, leading to consumer protests and congressional hearings in the United States, all of which compelled the US government to sign back on to the ICA in hopes of finding a way to somewhat stabilize prices. Coffee states, despite enjoying high prices, were ready and willing to participate in a new ICA, anticipating the likelihood of downward price shifts in the near future.
This is precisely what happened, and by 1978 the indicator price had fallen down to $1.55. This price seems high by historical standards and was above the ICA quota trigger price, but in real terms it was low due to the devalued US dollar. Coffee countries requested a higher trigger price from the United States but were rebuffed. As a result, a group of coffee countries once again turned toward collective coffee statecraft to push for a renegotiation of the terms of the ICA. This time, major Latin American producers met in Bogotá, Colombia, and formed the unofficial “Bogotá Group,” with the goal of using $140 million in funds to speculate on the New York coffee exchange in a manner designed to drive prices up. The Group met with success, driving prices up by several cents or more, and even creating its own trading company, Pancafe Productores de Café SA, in 1980 to formally continue with its activities. At this point, the United States stepped in and agreed to a new ICA with higher target prices in exchange for the disbanding of the trading company.
The ICA continued throughout the 1980s and was renewed in 1983 and 1987. This created higher and more stable prices than was typically the case in the coffee world, although prices continued to fluctuate greatly throughout the decade, from as high as $1.70 to as low as $1.07 per pound. Brazil and Colombia remained staunch supporters of the ICA, but agreement among other coffee countries was breaking down, in particular over the view that the ICA was unfairly limiting the exports of the most efficient and higher-quality producers. Costa Rica, for example, had developed into one of the most efficient coffee economies in the world, producing higher-quality “milds,” but due to the limits of the quota system regularly had to sell 40 percent of its crop at significantly lower prices on markets outside the ICA system – which were then often re-exported back to major markets as “tourist coffees.” Support for the ICA in the United States was also breaking down. Major US roasters increasingly viewed the ICA as a barrier to corporate profitability, restricting their access to higher-quality beans and preventing them from benefiting from global overproduction, which would drive lower green bean prices and higher profit margins if unchained from the quota system. The US state, for its part, had always been a reluctant supporter of the ICA due to Cold War politics that compelled it to acce
pt price regulation against its growing dedication to neoliberal reforms and “free trade.” The fall of soviet-style Communism in Russia in 1989, heralding the end of the Cold War, freed US negotiators and set the stage for the final curtain on the ICA.
In 1989, the United States took a hard line on negotiations for new quarterly quotas for the ICA. Brazil and Colombia fought to keep the agreement, supported by most African producers and most European importers. By this time, however, significant opposition had developed among smaller, higher-quality Arabica exporters, including Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Papua New Guinea, and Peru. Enough votes could not be mustered to approve new quotas and the ICA was suspended. The United States then formally withdrew from the ICO four years later in 1993.
The end of the ICA initiated a major drop in prices and intensified market volatility. Long-standing global overproduction, now unleashed, led to a swamping of global markets, made worse by the unchecked, rapid growth of new leading coffee exporters, in particular Vietnam (discussed in chapter 4). The coffee indicator price fell from $1.15 per pound in 1988 to 54 cents in 1992, recovered somewhat from 1994 to 1998, and then collapsed, dropping to 45 cents by 2002 – the lowest price in 30 years and, according to Oxfam International, probably the lowest real value in over 100 years, taking into account inflation.8 Extreme market volatility was further intensified by a flurry of new speculative activity. The total volume of futures contracts traded on the New York exchange in 1994 reached nearly 10 times the physical volume sold, so that, states Talbot, “by the mid-1990s, the vast majority of trades made on the coffee futures markets were made for purely speculative purposes.”9
The crisis in prices translated directly into social and political crises throughout the coffee world, sparking collapsing incomes, unemployment, bankruptcy, migration, hunger, and increased poverty for thousands of small and medium farmers and coffee workers. African coffee countries were among the worst hit by the crisis, as it came after two decades of thorough “free trade” reforms that had privatized and liberalized the coffee sector, dismantling most state coffee boards and leaving the public sector weak and unable to provide urgent support for farmers or protection for the industry overall. From a high of 32 percent in the 1970s, Africa’s share of world coffee exports dropped to around 10 percent, where it remains today. Côte d’Ivoire, once Africa’s leading coffee country, experienced a 69 percent drop in coffee production from 2000 to 2009, with devastating impacts on farmers and workers. Amid the worst years of the crisis, Northern transnational roasters continued to make huge profits, taking full advantage of the gap between collapsed green bean prices and much higher retail prices for roasted beans in the North.10
The profound impact of the global coffee crisis threatened the territorial and capital logics of many coffee states – sparking social unrest and declining state revenues, and damaging domestic coffee industries – drawing many of them back toward supporting renewed price regulation, including several countries that had actively opposed the ICA in 1989. A political consensus for new quotas, however, could not be reached, for a variety of reasons, but in particular due to fierce and unwavering opposition from the United States. Coffee states were able to pressure for new “International Coffee Agreements,” in 2001 and 2007, but they lacked any of the substantial regulatory mechanisms of the past. The 2001 agreement was entirely market-friendly, offering various programs aimed at supporting or promoting coffee training, access to information, marketing, technology transfer, enhanced bean quality, “sustainable” coffee growing, and increased coffee consumption. For all of these initiatives, the ICO had at its disposal $45.2 million, equivalent to less than 1 percent of the combined annual coffee sales of the world’s four largest coffee companies.11 The 2007 agreement (which did not go into effect until 2011) followed the same lines, along with offering a reorganization of the ICO’s operating structure in response to declining funds and capacity.12 Pleased with the market-friendly nature of these new agreements, the United States was persuaded to rejoin the ICO in 2004 after an 11-year absence.
After the darkest days had passed, coffee prices eventually began to recover, climbing over $1 per pound in 2007. Prices then leapt up to $1.95 per pound in 2011, reaching the highest levels in over 30 years. The price boom was driven by the combination of a poor harvest in Colombia, increasing demand for coffee among the growing middle classes in Brazil and throughout Asia, and a spike in speculation on commodity futures as investors scrambled for alternatives to stocks and bonds in the wake of the global financial crisis beginning in 2008. Before the celebration over the new price highs could really get underway, however, prices had already begun to fall. By the end of 2013, coffee indicator prices had dropped to around $1, the lowest prices in six years, in response to slowing economic growth in major coffee markets. Alarmed by these trends, and with effective collective state action nowhere in sight, Brazil once again turned to its old tool of economic statecraft, unilateral valorization, announcing in 2013 plans to purchase up to three million bags of Brazilian beans in the attempt to halt declining prices. Prices then began upward movement in 2014, this time in response to a major drought in Brazil, one of the worst in decades, destroying crop yields throughout the coffee regions.13
Assessing the ICA
The quota system of the ICA provided higher and more stable prices than the “free trade” decades that followed it, which meant higher incomes for the world’s coffee farmers and workers. If we look at the average annual composite indicator prices for green beans from 1963 to 1989 (ICA years) compared to 1990 to 2011 (post-ICA years), the numbers can appear to be quite close: from 1963 to 1989 the average price was just over 94 cents per pound; from 1990 to 2011 the average was just under 94 cents. This, however, does not tell the full tale. When the ICA began in 1963, prices for that year were only 32 cents. The ICA led to years of steady increase, so that the price never dropped below 32 cents again and, after 1976, the price never dropped below $1 until the last year of the ICA. The post-ICA years, in sharp contrast, began with a price of 91 cents in 1989. After that, prices swung erratically from extreme lows to extreme highs, going above 91 cents in only 11 out of 22 years, and at some points reaching a low of 45 cents. Thus, whereas the ICA years were characterized by higher annual prices and steady price increases (with the average price in its last decade nearly three times higher than when the ICA began in 1963), the post-ICA years have been characterized by highly volatile price swings that have, over a 20-year average, only just been able to get over the price that the free trade era began with in 1989.
Source: UNCTAD statistical database (http://unctadstat.unctad.org), accessed July 30, 2013.
Figure 3.1 Comparing ICA to post-ICA, free market prices, 1963–2012.
Given this reading of historical prices, free trade economists have generally not been able to oppose the ICA on the basis of it having resulted in lower prices for farmers. Instead, the ICA has been criticized for having artificially propped up prices, preventing farmers from responding to price signals by intensifying production or shifting into other, more viable market activities. This critique, however, fails to soberly assess the position of small farmers in real-world coffee markets. These farmers generally lack proper information on global market trends or the training to interpret these trends. The costs of improving productivity or transitioning into other export crops are usually prohibitive to small farmers. And the existence of other, more feasible market activities, such as decent wage labor off the farm, is assumed, even while the actual options available often involve illegal migration or low-paid, low-skilled work, living on the margins of poor urban shantytowns. The effect of the free trade critique of the ICA, as Louis Lefeber and Thomas Vietorisz have noted in their general critique of conventional economics, is to ignore the social impacts of real-world market conditions in favor of a narrow vision of economic efficiency that “may not be conducive to the enhancement of socia
l welfare, and may even lead to the opposite.” Instead, Lefeber and Vietorisz argue for policies based on “social efficiency rooted in concrete social problems” that consider the broader needs of “the social, economic, political and cultural system as a whole.”14
From the perspective of social efficiency, the ICA quota system was superior to the post-ICA years. Through collective action, coffee producing and consuming nations were able to attain higher and more stable prices for coffee farmers and workers. Importantly, these higher and more stable prices reached all of the world’s 25 million coffee farmer families. Fair trade coffee certification, by contrast (the subject of chapter 5), also seeks to offer higher and more stable prices and reaches around 670,000 families – about 3 percent of the world’s total. Moreover, while fair trade prices are guaranteed to be above conventional ones, they remain tied to a range defined by conventional prices and are not high in historical terms. From 1976 to 1989, the regular price of conventional coffee beans under the ICA system was close to or above what is today considered the “fair trade” price.15
Despite its general benefits, however, there are a number of important criticisms of the ICA that cannot be overlooked. It was continually plagued by issues around “tourist coffees” and overproduction that its members were ultimately unable to resolve. While the ICA did temper the extreme volatility of the coffee rollercoaster, it certainly did not eliminate it, and major price swings continued to pervade the industry. While the ICA did result in greater coffee income being retained in the South, it had little impact on how this income was distributed; internal politics within each coffee country played the determining role in this regard. Countries that pursued statecraft that involved a degree of redistribution of economic and political power into the hands of smaller farmers and workers, such as Costa Rica, were able to attain broader developmental gains than highly unequal coffee countries, such as El Salvador, Guatemala, and Brazil, where much of the additional income went into the pockets of the wealthy.
Coffee Page 7