Coffee Cartel Brews Up Counterattack to Price Skid

As the lowest coffee prices in seven years begin trickling down to supermarket shelves, the world coffee cartel is threatening to withhold beans from the market to force prices back up.

Better than expected Brazilian crops and a record harvest in Mexico are blamed for a glut that has pushed the world price of unroasted beans down to 67.7 cents per pound, the lowest composite price calculated by the London-based International Coffee Organization since November 1993.

In response, Procter & Gamble announced last week that it would lower the price on its Folgers brand 20 cents a can, a cut of about 8%. It is the third price reduction since August.

However, buyers of beverages at coffee houses such as Starbucks are unlikely to see any price break.

Coffee producers aren’t sitting idly by. The Assn. of Coffee Producing Countries, a London-based organization that represents 70% of global supply, will meet May 7 to discuss a plan to keep as much as 15% of members’ production off the market until prices reach an unspecified target, possibly as high as $1.20 a pound, sources say.

“Our secretariat has said we should pursue modest goals in price recovery,” said Roberio Silva, ACPC’s secretary general. He declined to confirm a price target.

Brazil, ACPC’s most-powerful member, is the driving force behind the “supply retention” scheme and has already set aside funds to keep as much as 5 million bags off the market. Colombia, the world’s second-largest harvester, is also an ACPC member and a backer of the Brazilian plan. Coffee accounts for 5% of Brazil’s total exports.

Analysts say efforts to “crank the market” since 1993 have failed. Coffee is a fragmented market with chronic overproduction. No one obeys the ground rules because of the high cost of coffee storage and because the temptation to cheat is too great, said Richard Wistisen, president of Commodity Information consultants in Provo, Utah.

Unlike oil, which can be left in the ground, coffee beans withheld from the world market must be stored in warehouses. Coffee growers, who in most countries are organized in cooperatives, must pay storage costs.

“In most of these countries, 50% to 80% of the production comes from poor, small farmers on a few acres. There is no way they are not going to harvest. Some money during a bad market is better than no money,” Wistisen said.

Moreover, non-ACPC members like Mexico, Guatemala and Vietnam, the third-, fourth- and fifth-largest world exporters by volume, respectively, have up to now spurned the cartel and “sell as much as they want as fast as they want,” said coffee analyst Walter Spilka of Salomon Smith Barney.

But the ACPC’s Silva said prospects are better this time because nonmembers Mexico and Vietnam are receptive to joining the scheme. On April 28, ACPC officials will meet with coffee representatives from Mexico, Guatemala, and other Central American nations in Mexico City to discuss strategy.

“So we have more leverage,” Silva said,

Brazilian growers, who typically supply one-third of the world’s beans, have seen prices plunge in recent months because heavy rains in December, which followed a drought in the fall, caused farmers to raise yield estimates from depressed levels.

“What happens in Brazil wags the market,” analyst Spilka said.

World output this year will total 104 million bags, weighing 133 pounds each. Brazil’s harvest is expected to be 28 million bags, less than its customary share, but better than expected after the drought.

Other countries are gaining on Brazil and Colombia. Mexico’s exports to the United States grew 29% in 1999 to 3.2 million bags, behind only Brazil’s 4.7 million bags and No. 2 Colombia’s 3.4 million bags. Vietnam’s sales also are growing, and in January that nation exported more coffee than Brazil.

Meanwhile, Gary Rhodes, a spokesman for Cincinnati-based Kroger Co., the nation’s largest supermarket company and parent of the 328-store Ralphs chain in California, said the latest Folgers price cut will take effect around May 22.

Giant coffeehouse operator Starbucks said no price cut is forthcoming, although the Seattle-based chain raised prices an average 10 cents a cup for coffee beverages last May. Starbucks has never lowered prices despite huge swings in the price of the beans they buy.

“We don’t change our prices on short-term changes on the coffee market. There are many other factors that go into the cost of business, labor and real estate being examples,” spokeswoman Helen Chung said.

Vivienne Garnett, owner of the Pannikin coffee shop in downtown San Diego, said she has seen no price reduction from her coffee wholesaler, Cafe Moto of San Diego. But she also noted that a 20-cents-per-pound price cut announced by Folger’s translates into savings of less than a penny per cup as a pound produces roughly 40 cups of coffee.

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Coffee Glut

Tumbling coffee prices have prompted the Assn. of Coffee Producing Countries to consider keeping supplies off the market until prices rise. But such efforts have failed in the past.

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Average annual price

Wholesale composite price of all coffee grades, per pound:

Friday: 67.7 cents

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U.S. coffee imports

Total value by country, in millions of dollars:

Colombia: $502.6

Brazil: 468.8

Mexico: 418.2

Guatemala: 301.9

Costa Rica: 132.7

Vietnam: 100.1

Peru: 89.4

Indonesia: 82.4

El Salvador: 66.9

Honduras: 49.3

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* 79% of American adults drink coffee daily or occasionally.

* Coffee drinkers consume an average of 3.3 cups per day.

* Arabica beans, from Central and South America, are used in higher- end coffees. Robusta beans, from Africa and Southeast Asia, are used in blends and instant coffee.

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Researched by NONA YATES / Los Angeles Times

Sources: International Coffee Organization, U.S. Census, National Coffee Assn.