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Information Central: The International Coffee Organisation finds its place in a free-market system

The geopolitics of coffee have a rich, colourful history, one that Scott Duke Harris explores with the ICO’s Jose Sette and others. The 1980s were a time of tumult and opportunity – and the same was true for the global coffee industry. Millions of consumers awakened to the appeal of smooth Arabicas as Starbucks brought quality brews to the masses. But, major traders and roasters also complained that opportunities were being lost because the industry had shackled itself to a complex set of export and import quotas when markets wanted to be free. Today, the International Coffee Organisation (ICO) prides itself as a source of solutions for the industry. But back then, many said, the ICO and its rules were the problem. In a July 1989 bulletin, a major German coffee trader, Bernhard Rothfos AG, declared that the reigning International Coffee Agreement had “failed because it was unable to adapt to changing market conditions…  Not permitting major consumer access to all the quality coffee they needed became increasingly irritating and was aggravated by the fact that production of finest Arabica quality grew disproportionately in the last 10 years. So the coffee was there, but the ICO took it upon itself not to allow a sufficiently large volume into the loyal member consuming countries.”  A two-tier market, the company said, became “one of the disagreeable by-products. Of course it was objectionable that non-member consumers should buy at cheaper prices. However, this became totally unacceptable when member consumers saw exactly the high quality they required passing by on its way to the non-members at heavily discounted prices.” But, things changed. Only four months after that harsh critique, the ascendance of free market principles helped bring down the Berlin Wall, setting the stage for the collapse of the Soviet Union. And, when the ICO adopted its next agreement in 1994, the quota mechanisms were gone. Viewing history and geopolitics through a coffee-coloured lens can be an intriguing exercise.  Today, the ICO – an intergovernmental group with headquarters in London and roots in the tension and strategies of the Cold War – ranks such thorny 21st Century problems as climate change and the balance of economic and environmental sustainability high on its priorities. Today, the ICO’s chief function is to promote the coffee industry by serving as a clearinghouse for best practices and a vast wealth of industry information available on its web site. “I’m a big believer in market transparency and open publication of trade data, so in general I think organisations like the ICO improve the general welfare rather than detract from it,” says Peter Timmer, a Harvard professor who studies food security.  “Of course, the minute they try to convert themselves into a regulator of exports onto world markets, they become less benign, but I don’t see that happening.” A regulator? That old ICO truly is on the ash heap of history, suggests ICO Executive Director Jose Dauster Sette. No, it’s never been coffee’s version of the Organisation of Petroleum Exporting Countries (OPEC), Sette patiently explains. Unlike OPEC, the ICO has always included both exporting and importing countries as members with 50/50 share of voting powers – the better to harmonise matters of supply and demand and promote the coffee sector as a whole. The latest International Coffee Agreement, adopted in 2007, is signed by 32 exporting countries and 33 importing countries, 27 of which are represented by the European Union. The International Monetary Fund has praised the ICO for its “practical contribution to the world coffee economy and to improving standards of living in developing countries.” On the whole, the coffee trade has a natural way of shifting money from the consumers in wealthier societies in northern latitudes to growers in poorer countries in the tropical growing zone. The world and the coffee industry have changed dramatically since the ICO was established under United Nations auspices in 1963. Today, the world’s second largest coffee exporter, Vietnam, may be nominally communist, but it has thrived in the modern coffee market. Sette adds the emphasis in noting that the 2007 agreement now in force states that its objective is “to strengthen the global coffee sector and promote its sustainable expansion in a market-based environment.” In the age of globalisation and given the importance of the World Trade Organisation (WTO), collective efforts like OPEC to manage export markets seem passé. Even OPEC is leaky, Timmer points out. A few years ago, when spiking rice prices prompted Thailand to propose the formation of OREC, an organisation of rice exporting countries, the idea was quickly abandoned when not even Vietnam was willing to join. Thailand and Vietnam rank first and second in rice exports. That’s not to suggest, however, that the ICO’s exporting and importing members have always made for a smooth blend of enlightened self-interest. On the contrary, the politics of coffee could be scalding hot and bitter. From 1963 until 1994, the ICO embraced elaborate systems of quotas, waivers and trigger mechanisms to regulate coffee exports. Even after those mechanisms were abandoned in the 1990s, the United States pulled out of the ICO in protest until an effort was made to re-establish a system of export quotas. “The ICO and other international commodity bodies have undergone a process of reinvention to change with the times,” Sette says. “Throughout, the process has been anything but smooth and fine-tuned, but more in terms of stop-and-go.” Today’s ICO and its agreements emerged from generations of effort aimed at moderating risk and the wildly volatile price of coffee. Weather, warfare, economic depression, rust leaf disease – all could have a major impact on the market. As coffee became more popular, rising demand encouraged growers to plant more shrubs and harvest more beans – sometimes too much – causing prices to crash. Meanwhile, demand would drop during the world wars and depression, also resulting in a surplus and falling prices. Growers frequently sought to band together to minimise the volatility and protect prices, in part because it typically takes four years for a planting to produce a meaningful crop. And, when frost and plant disease resulted in small crops, the rising prices would anger consumers. Marcelo Raffaelli, a Brazilian diplomat who represented his nation in the ICO from 1973 to 1977, offers a long, detailed view in his 1995 book “The Rise and Demise of International Commodity Agreements”. 
In Raffaelli’s telling, a pivotal development for coffee came on 13 March 1961, when young American President, John F. Kennedy, boldly spoke of “new frontiers” and heralded an initiative called the Alliance for Progress to promote economic growth in the Americas. Coffee growers took a keen interest in the news. “The United States is ready… to cooperate in serious case-by-case examinations of commodity market problems,” declared the alliance’s outline. “Frequent violent changes in commodity prices seriously injure the economies of many Latin American countries, draining their resources and stultifying their growth. Together we must find practical methods of bringing an end to this problem.” For the United States, this was a sudden change of tune. Neighbourly beneficence? Not exactly. Kennedy’s priorities would also include the disastrous Bay of Pigs invasion and the Cuban missile crisis. The Cold War was heating up – and Cuba was squarely in the communist sphere. “Washington found, therefore, that it was time to do something friendly to its Latin American neighbours,” Raffaelli observed. Interesting choice of preposition: “friendly to,” not “toward” or “with.” Collective efforts to manage the coffee market can be traced back more than 100 years. From the 1850s, Brazil so dominated the world’s coffee production that regional rivalries were within the country itself. As overproduction caused prices to fall, a 1903 agreement signed by the States of Sao Paulo, Minas Gerais and Rio de Janeiro, as well as the Federal Government, to create a surtax on coffee to be used to purchase and stock coffee as a means of price support. Initially, the effort was successful. Brazil’s policy of “holding an umbrella” over the coffee market, Raffaelli notes, would also lead it to destroy 56.7 million bags of coffee from 1931 to 1937, the years of the Great Depression. Brazil, after failing in two efforts to negotiate a way to stabilise coffee prices with Colombia and other Latin American neighbours, continued to try to control prices on its own. One result was that Brazil’s share of world exports fell from 59 per cent in 1930 to 48 per cent in 1937, as Columbia and the African colonies of Belgium, France, Portugal and the United Kingdom took a larger share of the market. From the demand side of the equation, it was the Second World War that transformed the United States into the dominant player. As European coffee imports slipped from 12.6 million bags in 1938 to only 5 million bags in 1940 and just 2 million in 1945, the American share of global coffee imports would soar to 83 per cent.  Market clout had shifted from Brazil to the United States. President Franklin Roosevelt, foreshadowing Kennedy’s initiative 20 years later, sensed coffee’s strategic dimensions and struck the Inter-American Coffee Agreement of 1940 with 14 Latin American countries. “By helping the Latin American nations to avoid a trade war for the US market,” Raffaelli wrote, Roosevelt achieved several objectives, including a stabilisation of coffee prices and “creation of a bond that would make it more difficult for the axis powers to entice the support of Latin American governments.”  America’s later entry into the war would prompt the United States government to impose a ceiling price for many products, including coffee. Raffaelli took a balanced view: “It may have been that US coffee consumers were, for at least part of the period, subsidised by the Latin American producers; on the other hand, one may wonder what would have happened to prices if the United States had decided to reap the purely commercial benefit of a trade war.” Latin America, however, would be insulted by the post-war demagoguery of American politicians after coffee prices soared, largely due to bad weather. A senator who styled himself as a champion of “the American housewife” convened a hearing on the “sudden and artificial” increase in prices – declaring its findings even before the “investigation” took place. Latin American nations took their complaints to the Department of State, and the subcommittee softened its report. “So much for conviction,” Raffaelli would write, “But the public relations damage had been done: from then on, in the public’s mind, the notion remained that coffee was a product open to manipulation by the producing countries, in alliance with dishonest speculators, all to the detriment of US consumers.” After bad weather produced a 30 per cent spike in coffee prices from October 1953 to April 1954, America’s Federal Trade Commission and a Senate banking subcommittee produced a more sophisticated analysis. Among its conclusions were that crop-reporting systems were inadequate and that prices were overly subject to the influence of speculators on the New York Coffee and Sugar Exchange and a few large roasters that dominated that aspect of the industry. As the problem quickly shifted from scarcity to overproduction, the Organization of American States in 1955 established a special committee on coffee in which Brazil, Colombia, Nicaragua and the United States playing leading roles. The committee in 1956 recommended the preparation of an international coffee agreement – even though the US representative said his government could not participate in it. To coffee growing countries, the US attitude represented indifference at best, hostility at worst. The Latin American countries then embarked on their own to organise and divvy up the market in export quotas, later inviting African nations (some still under colonial influence) into their alliance. This was, in effect, a kind of OPEC for coffee, representing 90 per cent of the world’s exportable production. But as Cuba went communist, the Kennedy administration decided it was best to join the global coffee klatch. Under the auspices of the United Nations, the governments of exporting and importing nations arrived in 1963 at the first international coffee agreement and the creation the ICO. The politics of coffee would remain contentious and complex, but now the ICO provided a forum for disputes. The first agreement embraced the allocation of basic export quotas based on historic levels to try to balance supply. (Brazil started with 39.5 per cent, Colombia with 13.9, all ex-French colonies with 9.44, and so on, down to 0.10 for Trinidad & Tobago.) New rules and quotas would invariably result in their flouting. One dishonest practice was dubbed “tourist coffee.” Raffaelli wrote: “It became profitable, for exporters aiming at cheating quota controls, for greedy intermediaries and for roasters in importing countries to engage in transactions where coffee ostensibly export to new markets had a quota country as a final destination.” To combat such practices, a system of controls was introduced that required shipments to be accompanied by a certificate of origin. “What became clear in all this,” Raffaelli emphasised, “was that exporters needed importers in order to police the honest implementation of the agreement.” Later would come the drama of the late 1980s and early 1990s, when complaints by Bernhard Rothfos were aired. Many players, Raffaelli suggests, apparently felt justified in resorting to backdoor deals to flout rules they considered unfair.  When the ICO adopted a new agreement in 1994, free market arguments prevailed. Regulatory mechanisms were eliminated – even though the arguments raged on.  The 1990s, Sette said, proved “a very difficult time of transition” for the ICO and the coffee industry. Efforts to reintroduce quotas prompted both the United States withdrawal and a counter thrust by exporting countries to set up the Association of Coffee Producing Countries (ACPC). Sette describes the group as “an OPEC-like entity” that ultimately failed in its bid to regulate the market through the retention of stocks.  Coffee prices cratered at the turn of the millennium.  “Only after 2000 and the closure of ACPC was the transition made to ICO’s current state and role,” Sette said.  Whether or not free-market principles are responsible, the coffee industry is much more robust today. It has also become, as Sette puts it, “a mature industry where change is slow,” though “not immutable.” And, even as the coffee industry has grown, free-market principles have made the ICO a much leaner organisation, having long since shed the bureaucracy of its days as market regulator. Back then, the ICO had as many as 200 employees. Today? Just 25. Staff fact
From its initial formation the International Coffee ­Organisation once had 200 employees, now it has only 25. ICO strategic goals With its days as a market regulator long past, the International Coffee Organization’s stated mission is “to strengthen the global coffee sector and promote its sustainable expansion in a market-based environment for the betterment of all participants in the sector.” Here is part of the ICO’s 27-point “action plan” under four broad strategic goals. Serving as a forum for the development of policies and solutions to strengthen the global coffee sector.
– Identifying priority issues, concerns and opportunities that affect the coffee economy and advising on responses.
– Consultations and cooperation on coffee policies and actions with governments, the private sector and international organisations. Enhancing transparency of the coffee market and enabling economic decisions to be taken on the basis of accurate and timely data.
– Detailed statistical coverage of the coffee value chain.
– Research studies and reports on the market situation and trends. Encouraging the development and dissemination of knowledge on the world coffee economy.
– Supporting the establishment of micro-credit and risk management programs, especially for smallholders.
– Stimulating technology transfer and technical cooperation, and encouraging scientific research and development.
– Organising workshops, training and other forms of knowledge sharing. Promoting a sustainable coffee sector.
– Assisting members in understanding and improving market structures and performance in order to provide wider access to credit and risk management instruments.        
– Disseminating information about sustainable techniques and the efficient use of environmental resources.

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