Tuesday, June 17, 2008

Open letter to Mr. Nestor Osorio - Executive Director of the ICO - on the coffee "crisis"...

Millions of coffee farmers around the world are literally dying of mass poverty following a crash in coffee prices which started in 1997 and lasted up to 2004/05; in fact, coffee prices reached their lowest levels in over a century in 2001/02, throwing millions of coffee farmers and their families deeper into poverty and untold misery.

Cynically, however, meanwhile coffee multinationals, traders and retailers are making millions in profits each year from coffee sales worldwide...

"The extent of the drop in prices and earnings in the crisis years 2000 - 2004  is very clear In the ten years 1980 – 1989 the ICO Composite Indicator Price for coffee averaged
127.92 US cents per lb. and coffee-producing countries earned an average of US$10.2 billion in annual export revenues from coffee. In the five years 2000 – 2004 the average price had dropped to 54.33 cents - the lowest in real terms for 100 years - and annual export earnings to US$6.2 billion.

Certainly the figures for coffee are clear : In the late 1980s and part of the 1990s earnings by coffee producing countries in terms of exports f.o.b. were around US$10-12 billion per year but they have now dropped to around US$5.5 billion. This contrasts with the continued growth in the value of retail sales in consuming countries from around US$30 billion in the 1980s to around US$80 billion at present."
Nestor Osorio, Executive Director of the ICO

Please find below a copy of correspondence exchanged between myself and the International Coffee Organization (ICO) on the severe "crisis" prevailing throughout coffee producing & exporting countries around the world.

I welcome your comments and feedback. Thank you

Excerpts from Mahatma Gandhi's thoughts on the cocoa and coffee trade:

The condition of plantation workers in Africa continued to receive Gandhi's attention. He wrote: "In cocoa plantations, Negro workers are subjected to such inhuman treatment that if we witnessed it with our own eyes we would have no desire to drink cocoa. Volumes have been written on the tortures inflicted in these plantations." (Indian Opinion, March 8, 1913, CW, Vol 11, p. 483). A couple of years earlier he had complained to his associate, H S L Polak, about "the abominable chocolate", calling it "that cursed product of devilish slave labour." [August 26, 1911, CW, Vol 96 (Supplementary Vol VI), p. 71].

At another place he had written during a voyage to England: " I also avoid tea and coffee as far as possible, since they are the produce of slave labour." (Indian Opinion, August 7, 1909, CW, Vol 9, pp. 277-8)

Tragically and sadly, a century later, cocoa and coffee producers continue to work under slavery conditions and chocolate and coffee are still very much " the produce of slave labor."

Copy of email sent to the ICO with regards to the coffee "crisis"

From: Yajna Centre [mailto:arya@yajnacentre.com]
Sent: 01 June 2008 23:30
To: Nestor Osorio
Cc: Hamida Ebrahim
Subject: coffee crisis...

Mr. Nestor Osorio
Executive Director
International Coffee Organization
London, England

Re: Coffee crisis

Dear sir,

I am writing to you with reference to my email of inquiry dated 26 May 2008 with regards to the severe crisis prevailing within the coffee sector throughout coffee producing & exporting countries.

In response to my email, Mr. Jose Sette recommended that I read the information published by the ICO on its website. The exercice has indeed proven to be very informative but has failed to provide answers to the specific questions raised in my email of inquiry and has raised further interrogations.

Please find below my observations and further interrogations:

Root (economic) causes behind the crisis:

Long-term market imbalance between supply & demand resulting in structural over-supply of coffee which in turn translates into constantly declining, low and unremunerative real coffee prices which do not reflect or take into account real production costs.

As you clearly stated:

“The coffee price situation arises from an imbalance between supply and demand that has now lasted for four years, exacerbated particularly by substantial increases in production (compared with the early 90s) and slow rates of increase in consumption.” ( G8 Summit , June 2003) source: ICO

In fact, statistical data collected and published by the ICO clearly reveals a structural long-term market disequilibrium between supply and demand – worsened by exponential increases in production by both Brazil & Vietnam from 1997-1999 within a background of stagnant demand/consumption - resulting in a structural over-supply of coffee on the world market ( + 30 million bags) which has directly caused and led to the crash in coffee prices observed from 1999-2004/05.

Excess stocks 2006/07

51.6 million bags = 62 % of 2006/07 imports/consumption = +6 months stock

Source: ICO 2006/07 annual report

Vicious trap cycle

To make up for the loss in revenue resulting from low and constantly declining real prices of coffee, farmers produce and export more coffee, which in turn results in creating a further excess supply of coffee on the world market, further reducing both world coffee prices and farm gate prices, thus further marginalizing and impoverishing both coffee farmers and coffee producing & exporting nations.

This is a vicious trap cycle which MUST be broken.

“Structural over supply in the commodities market lies at the heart of global poverty and instability.” (Brandt Report)

Example: Vietnam

Vietnam exponentially increased its coffee exports from 387,000 metric tons to 700,000 metric tons between 1998 and 2002 respectively, significantly increasing world supplies and – along with Brazil - directly contributed to an excess supply of coffee during this period ( + 25 million bags) which led to the plunge/crash in coffee prices which followed and lasted from 1999/2000 to 2003/04.

As a direct result, both world coffee prices and FOB coffee prices in Vietnam plunged from an annual average of $1500 per metric ton in 1998 to $428/mt in 2002; consequently, Vietnam’s export revenue declined by 50% from $600 million in 1998 to 300 million in 2002, despite Vietnam’s 80% increase of coffee exports during this period– or rather because of Vietnam’s significant increase in supply – which led to an excess supply of coffee during this period and resulted in a plunge/crash in coffee prices on the world market from $2500 metric ton in 1998 to an average of $1000 metric ton from 2000-2004/05, in conformity with King’s Law of Demand.

King’s Law of Demand

King’s Law of Demand clearly states that a surplus/deficit in a commodity will lead to a proportionally greater decline/increase respectively in the price of the said commodity relative to the surplus or deficit. (i.e. a surplus of 10% in the supply of coffee will lead to a decline of more than 10% in the price of coffee, and vice versa.)

Tragically, statistical data and historical evidence clearly demonstrates that coffee producing & exporting countries have been unaware of and/or ignoring this crucial economic law, digging their own mass graves in the process…


Market imbalance & structural over-supply

I have gone through the 2007 International Coffee Agreement ( ICA). Surprisingly, (and tragically) there are no provisions in the 2007 ICA to address, prevent and resolve the crucial issue of market imbalance, as has been the case with the previous 1994 and 2001 ICA since the suppression of production quotas, stock control provisions as well as of the Promotion Fund from the ICA in 1989, which inevitably and directly cumulated into the present coffee crisis.


How can the ICO expect to achieve its stated mission of “achieving a sustainable coffee sector…, particularly with respect to poverty eradication” if the 2007 ICA does not even address (and resolve) the root causes of the crisis?

As you have yourself publicly stated:

“ I believe that the real challenge is to develop policies and actions to avoid a recurrence of the type of imbalance between supply and demand that gave rise to the crisis… There is no doubt that the overriding need at present remains to guarantee the future of coffee through addressing the problem of economic sustainability, i.e. to ensure that coffee

production does not continue to entail a loss to growers…It follows that the strongest priority is to implement measures which encourage balance in the market

For many months now the ICO has attempted to alert the international community of the
consequences of a problem caused in essence by the continued excess of supply over
demand….it is vital not to lose sight of the pressing need to take substantive measures to maintain greater market equilibrium… However I must reiterate that the main priority must be measures which can actually restore some market balance…

Basically the process of analysis has been completed and must now give way to implementing solutions…”

Source: Speech made at the 2nd World Coffee Conference, 2003

In view of the above, can you therefore please indicate:

1) what policies and mechanisms the ICO has put in place to address, prevent and resolve the short, medium and long-term structural market imbalance and to stabilize coffee prices at remunerative levels based on actual cost of production and in equilibrium with the market forces of supply and demand?

2) what policies and mechanisms the ICO has put in place to reduce/eliminate the excess stock of coffee on the world market which continuously and significantly depress real prices of coffee over the long run?


“The problem of the deterioration in real export prices has become even more complicated by the increase in price volatility levels. International coffee prices have shown a fluctuation of more 50 percent annually in recent years whereas during periods when the market was regulated prices fluctuated between 10-15 percent around their medium-term trend. These high levels of price instability have a very negative effect on the development process, as has been confirmed by a number of studies carried out by the World Bank.” (Jorge Cardenas, Chairman of the 1st World Coffee Conference, 2001, London )

Coffee prices are characterized by extreme volatility and instability due to speculative trading of coffee on the futures commodities exchange markets of London and New York, which in turn sets and determines coffee prices based on previsions of future market fundamentals, using various speculative parameters such as future supply & demand, world stocks, climate and geopolitical situation in coffee producing countries, currency fluctuations, etc., and thus do not reflect or take into account real production costs.

As David Ricardo clearly stated:

“It is production costs, not the interaction between supply and demand that sets and determines prices of commodities.” ( David Ricardo, Principles of political economy and taxation).

Again, surprisingly, there are no provisions in the 2007 ICA to address and regulate speculative trading of coffee on the futures exchange markets which result in extremely volatile, unstable and unremunerative prices of cocoa which do not reflect or take into account real production costs.


3) what policies and mechanisms has the ICO put in place to regulate speculative trading of coffee on the futures commodities exchange markets which results in highly unstable and volatile coffee prices which do not reflect or take into account real production costs?

Exchange rate fluctuations

Currency exchange rates fluctuations have a direct impact on both the cost and the real price of coffee and thus on the revenue of both coffee farmers and coffee producing & exporting countries. A devaluation of the US dollar translates into a decrease in real revenue for producing countries & offsets any marginal increase in coffee prices on the world market.

In fact, over the last five years, the value of the US dollar has fallen by over 30% vis-à-vis the Euro. Since coffee prices are quoted and sold in US dollars, this obviously translates into substantial financial loses for coffee producers. However, surprisingly ( and tragically), past and present ICAs have never contained provisions to address this crucial parameter…!

Increase in the price of oil

The price of crude oil is a determinant factor in the costing and profitability of coffee farmers. As you know, oil prices have exponentially increased over the last 6 years – from $US 20$ in 2002 to over $ US 120/barel currently– significantly increasing the cost of production, as prices of inputs have skyrocketed.

The deadly combination of the loss in value of the US dollar and the exponential increase of the price of oil over the last 5-6 years directly and exponentially increases the cost of production of coffee producers on the one hand while significantly decreasing both the real price of coffee and the revenue and profitability of coffee producers on the other.

Tragically, however, none of the previous three ICA ’s ( 1994, 2001, 2007) contained any provisions to address this crucial issue…!

As you said yourself:

Although current prices are now more in line with historical levels and the remuneration of coffee-growers has become more compatible with their costs, these gains have been significantly eroded by factors exogenous to the coffee market. The ascent of oil prices to record levels has had a direct impact on the costs of farmers’ inputs. In addition, the continued weakness of the US dollar, which is used as a reference in the international coffee trade, has meant that prices of coffee in many local currencies did not fully reflect the improvement noted above. The weakness of the US dollar continues to affect the real income of coffee producers. (ICO 2006/07 annual report)

In view of the above observations, the following additional questions arise:

4) How does the ICO explain the fact that none of the past ICAs ( 1994, 2001 ) as well as the current 2007 ICA do not contain any provisions to address the above briefly-outlined crucial economic issues ( i.e market imbalance, structural over-supply, excess stocks, speculative trading, currency exchange rates fluctuations, oil prices, etc.) which have a direct and significant impact on coffee prices and on the cost, revenue and profitability of coffee producers?

5) How does the ICO expect to “promote a sustainable coffee economy for the benefit of all stakeholders and particularly of small-scale farmers in coffee producing countries, particularly with respect to poverty eradication,” without even addressing – let alone resolving - the above outlined crucial economic issues within the coffee sector?

I thank you for shedding some light into these interrogations and I look forward to hearing back from you in the near future.

Best regards,

Arya Tajdin.
Executive Director
Yajna Centre
Dar es salaam, Tanzania

ICO's response

Dear Mr. Tajdin,
Many thanks for your interest in the activities of 
our Organization.
 With regard to your request for specific examples of
 polices and mechanisms put in place by the ICO, it
 is important to note that the International Coffee
 Agreement of 2007, in common with all international
 commodity agreements currently in force, does not
 provide for the types of market regulatory
 instruments (such as export quotas) that existed in
 the past. Instead, the ICO works by bringing
 together producing and consuming countries to tackle
 the challenges facing the world coffee sector
 through international cooperation. It makes a
 practical contribution to the world coffee economy
 and to the improvement of standards of living in
 developing countries by:
 * enabling government representatives to
 exchange views and coordinate coffee policies and
 priorities at regular high-level meetings;
 * improving coffee quality through the Coffee
 Quality-Improvement Programme and specific projects;
 * increasing world coffee consumption through
 innovative market development activities;
 * initiating coffee development projects to
 improve quality and marketing
 * encouraging a sustainable world coffee
 * working closely with the private sector
 through a 16 strong Private Sector Consultative
 Board which tackles issues such as food safety;
 * providing objective and comprehensive
 information on the world coffee market; and
 * ensuring transparency in the coffee market
 through statistics.
 Details of specific actions taken to address these
 issues may be found in our Annual Review and in
 various sections of our website (www.ico.org)
With kind regards,
José Dauster Sette
Head of Operations
International Coffee Organization
22 Berners Street
London W1T 3DD
Tel: +44 (0) 20 7612 0602
Fax: +44 (0) 20 7612 0630
Thu, 12 Jun 2008 12:07:25 -0700 (PDT)

From: "Yajna Centre" Add to Address Book Add Mobile Alert
Subject: RE: coffee crisis...
To: "Hamida Ebrahim"
CC: sette@ico.org, osorio@ico.org

Dear Sir,

Thank you for your email; unfortunately, but not
surprisingly, you have brilliantly failed to provide
answers to the specific questions raised in my email
of inquiry dated 01 June 2008, addressed to Mr. Nestor

Nevertheless, beyond the deceitful "poverty
eradication" rhetoric quoted and preached in the ICO
literarure, both historical evidence and statistical
data published by the ICO on the coffee sector clearly
reveals a different picture altogether...

In fact, I believe that it is fair to say - based on
historical evidence and statistical data of the coffee
sector - that the ICO and its members have in fact
done nothing over the course of the last 17 years -
since the collapse of the supply-management mechanism
in 1989 - to achieve market equilibrium between demand
and supply and to secure stable and remunerative
coffee prices for millions of coffee farmers around
the world.

I beg you to differ with this claim with historical
facts and figures and not with deceitful rhetoric
because you are failing to make your case and
insulting my intelligence in the process.

As a direct result, over this period, millions of
coffee farmers around the world have been thrown
deeper into mass poverty and untold misery, which
unfortunately your statistics do not reveal...; does
the ICO and its members have any statistical data that
reveal the untold numbers of destroyed lives, human
poverty, misery, suffering, hunger and death that
occur as a direct result of extremely unstable,
volatile and constantly declining unremunerative
prices of coffee on the world market...?

And cynically, while millions of coffee farmers are
literally dying as a direct result of policies
developed, pursued and implemented by the ICO, coffee
multinationals, traders and retailers are generating
millions in profits from coffee sales worldwide...!

Is that the "sustainable coffee economy the ICO is
encouraging" and aiming to achieve...?

Please note that I shall look into every possible
legal means available to put an end to this endless
and ongoing mass economic genocide and to bring all
those who are actively involved in this "crime against
humanity" to justice.

Arya Tajdin
Executive Director
Yajna Centre
Dar es Salaam, Tanzania