From: "Yajna Centre"
Subject: Fwd: coffee crisis...
To: chairman.coffeeboard@gmail.com
Mr. G.V. Krishna Rau
Chairman of the Executive Board of the ICO
Dear sir,
I congratulate you on your new appointment as Chairman
of the Executive Board of the International Coffee
Organization.
I hereby wish to seize this opportunity to forward you
a copy of correspondence addressed to Mr. Nestor
Osorio with regards to the severe ongoing "crisis"
prevailing throughout coffee producing & exporting
countries around the world.
Unfortunately, all the interrogations contained in my
letter of inquiry have remained unanswered to this
day.
Hopefully, you - as the newly appointed Chairman of
the Executive Board of the ICO - will be able and
willing to shed some light into the interrogations
raised in my letter of inquiry.
I thank you for looking into my inquiries and I look
forward to hearing back from you in the near future.
Please find below a copy of my letter of inquiry
addressed and emailed to Mr. Nestor Osorio on 01 June,
2008.
Best regards,
Arya Tajdin
Executive Director
Yajna Centre
Dar es salaam, Tanzania
--- Yajna Centre
> Date: Sun, 1 Jun 2008 15:29:52 -0700 (PDT)
> From: Yajna Centre
> Subject: coffee crisis...
> To: osorio@ico.org
> CC: ebrahim@ico.org
>
> 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 ( +30%) within
> a background of stagnant demand/consumption -
> resulting in a structural over-supply of coffee on
> the world market which has directly caused and led
> to the crash in coffee prices observed from
> 1999-2003.
>
> 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 cocoa prices and farm gate prices, thus
> further marginalizing and impoverishing both cocoa
> farmers and cocoa producing & exporting nations.
>
> This is a vicious trap cycle which MUST be broken.
>
> “Structural over supply in the commodity 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…
>
> INTERNATIONAL COFFEE AGREEMENTS (ICA)
>
> Market imbalance & structural over-supply
>
> I have gone through the 2007 International Coffee
> Agreement ( ICA). Surprisingly, 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.
>
> Question:
>
> 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 cause of the crisis?
>
> As you have yourself publicly rightly 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?
>
> Speculation
>
> “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.
>
> Question:
>
> 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
>
> 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 decreased by over 60% 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
>
>
>
>
>
>
