Grounds for a Price War : Brazilians Say This Week’s Talks Are Key to World Coffee Exports

Brazilian coffee exporters are warning that world prices for their product may rise to exorbitant levels if the United States and other consuming countries do not agree to a new pact for stabilizing the international market.

A new round in continuing negotiations by the International Coffee Organization is scheduled to begin Monday in London.

There hasn’t been an export quota agreement between producer and consumer countries since 1989, and prices have dropped to their lowest real levels in history.

Orlando Correa, an exporter who heads the Coffee Commerce Center of Rio de Janeiro, said consumer countries have shown reluctance to reach an agreement in previous rounds of talks. The coming round will be crucial, Correa said in an interview.

“If there is no significant progress in these meetings, I believe this chapter of coffee history will close,” he said.

Correa participates in coffee negotiations as an adviser to the official delegation of Brazil, the world’s biggest coffee producer. He argued that a new agreement would favor consumer countries because they have had the advantage in negotiations. Producers, hurt by low prices, have been forced to make major concessions, he said.

Unprofitable prices are forcing many Brazilian coffee farmers to uproot their bushes. Since 1989, Correa said, the number of coffee bushes in Brazil has dropped from 4.3 billion to 3 billion. Brazil’s 1992 raw coffee exports earned $928 million, the lowest amount since 1976.

If production in Brazil and other countries continues to shrink, shortages will begin driving world coffee prices up, Correa said.

In Mexico, the sixth-largest producer, coffee export earnings totaled $261 million in 1992, down 25% from 1991. Although production levels remained about the same, some growers have pulled out coffee bushes to plant other crops.

If prices keep dropping, Mexico expects to lose hundreds of acres of coffee as growers decide not to replant.

Because of shortages in the early 1970s, wholesale prices rose to more than $3 a pound in New York. Prices have been under a $1 per pound for most of the last three years and were between 57 cents and 55 cents last week in New York.

This year, expected coffee production will fall below world demand, and that “could lead to a very big increase in the price,” Correa said. Abnormally high prices could reduce demand for coffee.

In the long run, such volatile cycles are bad for both consumers and producers, Correa contended. The goal of an international coffee agreement would be to stabilize prices at a level that is reasonable for both sides by setting coffee export quotas.

Most industry analysts also believe that coffee crop prices will rise eventually if negotiators are unable to reach a quota agreement.

“Without an agreement, the less-efficient (coffee) producers will get out of the business because there’s not enough of a financial return,” creating shortages that will raise prices, said Judy Ganes, an analyst at Merrill Lynch in New York.

If the price for raw coffee rises, consumers will likely pay more for the finished product, Ganes said. Ultimately, producers in Brazil and Colombia (the second-largest producer) would determine how much prices would rise, she said. If coffee production is reduced dramatically in those countries, price increases would be more sizable, Ganes said.

Ganes said the prospects for some kind of price rise is likely because she does not believe that the negotiators will reach an agreement.

“There are just too many sticking points,” she said.

The last coffee agreement, among 50 producing countries and 21 consuming countries, collapsed in 1989, partly because prices were being undercut by some producers selling excess coffee to consumer countries that do not belong to the international organization. Under terms negotiated last year, “universal quotas” for exporters would also govern sales to non-member countries.

Despite low crop and whole prices in recent years, there has not been a corresponding drop in the price consumers pay for coffee because the cost of raw beans is a small part of coffee companies’ overall expense, said Arthur Stevenson, an analyst at Prudential Bache Securities in New York.

“The finished produce we see on the shelves includes the price of transportation, processing, marketing, insurance and other expenses,” Stevenson said. “The drop in producer prices has only allowed coffee companies to keep consumer prices stable.”

Full agreement has not been reached on details of a proposed system for selective adjustments of quotas for premium grades of coffee. Under the old agreement, Brazil resisted pressures to accept a reduction in its quota to allow bigger quotas for special quality coffees from Colombia and Central America that have become increasingly popular.

Since 1989, Brazil has accepted selective adjustments. But Brazil wants a new agreement to include provisions for reviewing the agreement’s mechanisms after a year to change any that have not worked well. For example, if an agreement does not boost the price for raw coffee, the Brazilians would like to make adjustments. Consuming nations, on the other hand, prefer a three-year wait for any such review and adjustment process.

Oswaldo Aranha, president of the Brazilian Federation of Coffee Exporters, said consumer countries have resisted the producing nations’ review proposal.

Aranha said the United States has made it clear that it would prefer not to enter a coffee agreement but is participating in negotiations “as sort of a special favor to Colombia,” in return for Colombian efforts to control cocaine traffic.

He observed that low coffee prices resulting from the lack of an agreement have created severe hardships for poor countries of Central America and Africa that depend heavily on the product. “The United States and other consumer countries don’t show any sensitivity in that regard,” he said.

Echoing Correa, Aranha warned that if coffee production continues to drop, “the price will go up in a totally disorganized and nefarious way.”

Aranha is also an adviser to the official Brazilian coffee delegation. He said that if Brazil and other producers do not see a sincere willingness by consumer countries to negotiate an agreement in the next round of talks, “for us, the negotiations are over.”

Times staff writers George White in Los Angeles and Juanita Darling in Mexico City contributed to this report.

Brazil’s Coffee Exports

Brazil, the world’s largest coffee producer, complains that it is earning less and less from increased exports because there is no export quota agreement between producer and consuming countries to stabilize prices. The declining value of Brazillian coffee is reflected in falling wholesale prices on the New York Coffee, Sugar and Cocoa Exchange. Volume of Brazil’s coffee exports in bags (millions):

1987: 17.5

1988: 17.5

1989: 17.2

1990: 16.6

1991: 20.8

1992: 20.4 Highest price per pound (New York):

March 1988: $1.31

1989: 1.29

1990: .90

1991: .83

1992: .54

1993*: .58 *as of March 16

Sources: International Coffee Organization, Data Resources Inc.