1. Introduction
Although depressed prices have been common to most commodities, much attention has focused on coffee. As the single most important tropical commodity accounting for almost half of total net exports of tropical products, coffee has become emblematic of the problems faced by all developing country agricultural commodity exports. Price falls for coffee have been particularly dramatic: after a brief recovery in the mid-1990s when buffer stocks were finally cleared, real coffee prices had fallen by 2001 to levels lower than ever recorded. In real terms coffee prices today are less than one third of their 1960 level, and for many producers less than the cost of production. According to the International Coffee Organization (ICO), this impacts directly upon an estimated 20-25 million households in coffee-producing countries, and indirectly upon up to a further 100 million engaged in upstream and downstream activities. The wider economic and political implications are clear: as James Wolfensohn, President of the World Bank, noted, "The reduction of coffee prices and also other commodities... is undermining the economic sustainability of countries and millions of families in Latin America, Africa and Asia".[2]
Many different explanations have been proposed for the precipitous decline in coffee prices. These include the emergence of Viet Nam as a major producer and exporter, the depreciation of the Brazilian real, "underconsumption", exploitation of market power by roasters and retailers, technological change in roasting, domestic market liberalization and the abolition of parastatal marketing agencies. In its recent resolution, the European Parliament attributes the crisis to the dismantling of the international coffee agreement and the policies implemented by the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO). But basically the explanation lies in the market fundamentals of supply and demand. While it is tempting to assume that such a precipitous fall in prices must be due to some new factor or some change in market behaviour, according to FAO price determination models the operation of market fundamentals has not changed. Specifically it is the recent rapid growth in global supplies against sluggish demand growth which has led to falling prices, and the low price elasticity of demand means that these price falls are severe.
Suggested solutions to the crisis have been as various as the explanations. These have included supply control, demand promotion, guaranteed prices, product differentiation, support for diversification (and trade liberalization to provide opportunities for diversification), vertical coordination or integration through the value chain, raising the profile of commodity problems in international fora, fair trade initiatives (including obliging the four main coffee roasters to pay a fair price to farmers and end "exploitation"), and even grower support funded by a windfall tax on roasters.
A tendency for expanding supplies to outstrip demand growth on world markets is not peculiar to coffee. The resulting market imbalances coupled with low price elasticities of demand led to the same downward pressure on prices across a broad spectrum of commodities, albeit less dramatically than for coffee. Some of the same solutions, notably demand promotion and supply control, have been implemented or are under active discussion in a variety of other international industry initiatives.
This paper examines the nature of the coffee crisis and discusses industry responses. Specifically, it focuses on the persistent decline in prices and its origins in the tendency for supply on world markets to grow ahead of demand. It considers experiences in internationally coordinated attempts on the part of producers and exporters to influence those market fundamentals by seeking to regulate supply or promote demand. It reviews recent efforts in these directions and examines what lessons can be learned for other commodities.
2. The nature of the international coffee crisis
The collapse in international coffee prices since 1998 is evident from Figures 1 and 2. The average ICO composite price fell by 21 percent in 1999, 25 percent in 2000, and 29 percent in 2001 to reach the lowest annual average since 1971. Apart from the upturn in the second half of the 1990s, prices have trended steadily downwards since the peak in 1977. Since mid 2001 prices appear to have levelled out a little but at very low levels, and this greater stability appears to have continued into the first three quarters of 2003.
The recent variability of prices is also apparent in Figures 1 and 2 with the downward trend interrupted by periodic peaks on average every nine or ten years since the maximum in 1977 with the most recent peak in 1998. Variability is important since the duration and amplitude of price movements are relevant to the design of countermeasures to stabilize prices. If shocks are long-lived then the costs of stabilization in terms of storage and financing will probably outweigh any consumption or income benefits. The persistence of shocks in commodity prices has been explored in a recent IMF study[3]. This found that shocks to commodity prices are typically finite in duration but long-lived. For coffee, persistence (measured as the length of time until the effects of a shock decline to half the original magnitude) is at least nine years. This is also evident from Figures 1 and 2. In these circumstances the IMF study concluded that the costs of operating any kind of stabilization are likely to exceed any smoothing benefits. Ironically the International Coffee Agreement was regarded as relatively successful.[4]
Price movements reflect the evolving demand and supply situation. It is clear from Figure 3 that supplies of coffee on the world market have typically run ahead of the growth in demand. Since domestic consumption in producing countries did not expand sufficiently to absorb growing supplies, coffee exports increased. But as developed country markets became increasingly saturated growth in export earnings lagged behind growth in export volumes. The export earnings of coffee producing countries have fallen from US$10-12 billion in the early 1990s to US$5-6 billion currently. However the value of retail sales of coffee has increased over the same period from around US$30 billion to around US$70 billion.
