COMMODITIES: High Interest Rates Hurt Coffee Producers

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Oct 9 1996 (IPS) - A paradoxical combination of small harvests and low coffee prices, which is hurting producing countries, can be explained by the high interest rates in Latin America, according to a business leader in Brazil.

Those high interest rates have considerably increased the costs of production and storage of the beans, says Osvaldo Aranha, president of the Brazilian Federation of Coffee Exporters (FEBEC). And as credit is expensive, the producers need to sell their products quickly in order to earn back those costs.

As a result, the producers have little negotiating power vis a vis the importers in industrialised countries, where interest rates are much lower.

In Brazil, the world’s largest coffee producer, interest rates have been climbing because of the government’s tight monetary policy – aimed to keep inflation down.

“We only had good prices for about a year,” after the frost and drought that had reduced coffee production in Brazil since 1994, says Aranha. Current prices, which hover at around 110 dollars per 60-kilo sack and are still declining, “complicate” the situation of exporters, he adds.

Brazilian production has recovered somewhat compared to the very bad harvests in the last few seasons. This year, it is expected to reach between 25 and 26 million sacks.

But Aranha believes that this harvest will not be enough to reach the country’s export goal of 15 million sacks of coffee beans and 2.5 billion sacks of instant coffee. Internal consumption is estimated to reach 11 million sacks in the 1996-97 season.

Meanwhile, the Federation of Coffee Producers of Colombia confirmed a decline of 12.8 percent in production in the first eight months of this year. It predicts a harvest of only 11.7 million sacks for the end of the year, compared to 13.5 million in 1995.

The combined effect of small harvests in the two largest coffee producers and low reserves in the importing countries at the beginning of the northern winter, should normally drive prices upward.

Reserves in the United States — the world’s largest consumer, whose requirements are 18 million sacks a year — are the lowest in the last seven years, according to the Green Coffee Association, based in New York.

But producers are worried that even the effect of low supply paired with high demand will not be enough to mend international prices.

Apart from the high interest rates, there is the factor of a lack of coordination between exporting countries, Aranha says. Guatemala, Mexico and Vietnam have remained outside the Association of Coffee Producers.

These are important producers, and Vietnam is “the only country in the world that is increasing production. It is doing so strategically, and independently of prices,” observes Aranha.

Mexico has not joined the association because of its links with the United States (through the North American Free Trade Agreement – NAFTA).

Brazilian coffee improved its competitiveness when the government decided to ease the tax burden on the coffee sector, a measure that will cost the country 260 million dollars a year in loss of fiscal income.

But under current conditions the measure will mostly benefit importers, Aranha fears, as it will result in lower prices.

His pessimism is not shared by everyone in the coffee industry.

Manuel Bertone, vice-president of the National Council of Coffee, an organization which represents 210,000 Brazilian coffee producers, believes that Brazil will recover the markets it has lost since 1989, when the economic clauses of the International Coffee Agreement were suspended.

The roasting industry predicts an increase in annual internal consumption of 10 percent, reaching a total of 15 million sacks in the year 2000. With that goal in mind, it is investing in publicity and incentives for the quality of production.

Coffee producers in the southern state of Para — who were most affected by the frosts in 1994 — are confident that they will recover. Their region was the largest producer in the country in the 1960s.

And the central area known as the ‘Cerrado’, the new coffee frontier, is already producing 3 million sacks of coffee a year. Its higher quality, determined by an adequate rainfall pattern, has boosted internal consumption, says Ana Arakaki, director of the coffee growers association of Patrocinio, a municipality in Cerrado.

The quality of the product in Cerrado, confirmed by the prizes it received from the Italian company Illycaf, allows producers there to set better export prices, says Arakaki.