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Coffee Cartel’s Return: Is Brazil For Real?

March 23, 1991

Undated (AP) _ Brazil says it is eyeing a return to coffee export quotas but analysts wonder: Can it be true? Is the world’s biggest coffee producer really ready to concede in the stand-off that caused the price-support system to collapse nearly two years ago?

″The trade is questioning how valid this whole thing is,″ said Celeste Georgakis of Cargill Investor Services Inc.

Even if Brazil does pursue a new International Coffee Agreement, ″it’s going to take a long time to iron out all the problems they had,″ she said Friday, one day after Brazil’s government announced it was considering a return to quotas.

The impediments that led to the collapse of the last coffee agreement included Brazil’s refusal to accept a smaller export quota so that other producer countries could ship more of their higher quality beans to coffee- consuming countries, including the United States.

The coffee futures market reflected a high degree of skepticism about Brazil’s announcement. The contract for May delivery of green, unroasted coffee on New York’s Coffee, Sugar & Cocoa Exchange fell 1.95 cents Friday to 93.05 cents a pound.

The market opened with a surge that analysts attributed mainly to Brazil’s indefinite suspension of coffee export registrations while it reviews its position on quotas. Prices fell back after the South American nation indicated it could reopen registrations at any time to meet the emergency needs of growers and exporters.

The International Coffee Agreement is a price-control system established by the 74-nation International Coffee Organization. The organization is composed of most of the world’s largest coffee-producing and coffee-consuming countries. It seeks to control prices by limiting the amounts of coffee that each producer country may sell to the consumers.

The last International Coffee Agreement ended early in July 1989 when Brazil balked at U.S. demands that it relinquish some of its 31 percent market share to allow for increased exports from Colombia, Central American and West African countries. Those nations produce the finer gourmet coffees that comprise a growing segment of U.S. consumption even though overall U.S. demand for coffee has been falling for years.

After the agreement collapsed, coffee prices plunged from about $1.30 to less than than 70 cents a pound as producer countries battled for market share. Nearly two years later, Brazil’s share of the export market has fallen to less than 25 percent while many smaller producer countries have gained market share.

Nevertheless, the drop in coffee prices has hurt the economies of countries such as Colombia and the Ivory Coast. Colombia has repeatedly urged a resumption of export quotas to prop up prices.

Thursday’s statement by Brazil that it was considering a return to quotas was ″a total turnaround after two years of taking a hard stance and saying ’We’re in favor of free markets,‴ said Merrill Lynch analyst Judith Ganes.

If Brazil is serious about a return to quotas, the move could be motivated by the country’s shrinking coffee production, a result of government austerity programs that have curtailed agricultural loans.

The U.S. Agriculture Department estimates a 1991-92 Brazilian coffee harvest of 25 million 132-pound bags, which would represent the fourth consecutive decline in annual production.

With the shrinking production, Brazil probably could no longer supply 31 percent of the export market and so might not object to a quota cut, Ganes said.

Coffee supplies from elsewhere are abundant, though. So by embracing a return to quotas, Brazil might be able to ensure a market for virtually all of its crop at higher prices than it would otherwise receive.

″The key is whether Brazil is sincere about resuscitating a new coffee agreement. If they are, it probably does have some validity,″ said Stephen W. Platt, analyst with Dean Witter Reynolds Inc. in Chicago.

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