oversight

Coffee: Production and Marketing Systems

Published by the Government Accountability Office on 1977-10-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                     DOCUMENT RESUME

C.,     5 -    [B3054297]

CcZfee:        Production and    arketing Systems. ID-77-54; E-175530.
October 28, 1977. 63 pp. + 7 appendices                (28 pp.).

Repor: to the Cngress; by .iobert F. Keller, Acting Comptzcller
General.

Issue Area: International Economic and ilitary Programs: U.S.
    Balance of Trade (602); Food: Federal Fcod Policy
    Decisionmaking Structure (1715).
Contact: International Div.
Budget Function: International Affairs: Conduct of pcreign
    Affairs (152).
Orqgnization Concerned: Department of the reasury; Department
    of Aqri.ulture: Economic esearch Service; Department of
    Commerce; Department             of State; Federal Crcp Insurance Corp.
Concressional  elevance:             House Committee on Agriculture; Senate
     Committee on Agriculture, Nutrition, and crestLy; Ccngress.
Au~ hority: Commodity Futures Trading Ccmissicn Act of 1974 (7
     U.S.C. 4(a)).
                Coffee is produced in 53 countries and territories and
is vital to the economies of many underZeveloped ccuntries that
produce it. In 1976 its export value as cre than B8 billion,
second in value only to petroleum in internaticnal ccmmcdity
tra-de. Over half of Colombia"s and El Salvador's 176 export
earr.ings were from coffee. Vindinga/Conclusicns: The United
Stites has joined the 1962, 1968, and 1976 Internaticnal offee
Aqreements primarily to help stabilize prices and export income
of the developinq producinq countries. Although fluctuations in
the price of exported cotfee appear tc be in response tc
anticipated availability of coffee, the policies and procedures
or exporting countries influence availability and create
pressures on price. The use of minimur expczt prices, export
taxes, and other measures has occasionally limited the
availability of a country's coffee supply tc the wcrld arket.
The Department of State has primary eepcsbility for
f,~rmolatinq U.S. policy on cotfee and coZfet-exrcrtiLg
cou:ltries. t re.presents the United tatis in the International
Coff          Oirganization which administers the Internaticnal Ccffee
Aqrt              The   epartments of Agriculture and        cmmerce are
resp,            -      "onitorinq    the coffee commodity situation ky
colle.                   nd information on ccffee production and
warketin,.                h some aps and weaknesses xist, data and
information               ted and compiled by the Government are
sqfficient                yze current supply and demand. (Author/sC)
          REPORT TO THE CONGRESS

          BY THE COMPTROLLER GENERAL
v.   t*   OF THE UNITED STATES




          Coffee: Production and
          Marketing Systems

          Coffee is produced in 53 countries and ter-
          ritories and is vital to the economies of
          many underdeveloped countries that produce
          it. In 1976 its eport value was more than
          $8 billion, second in value only to petro-
          leum in international commodity trade.

          The United States has jc;,,,d the 1962,
          1968, and 1976 International Coffee Agree-
          ments primarily to help stabiliiz pices and
          export income of the developing producing
          countries.

          Fluctuations in the price of exported coffee
          appear to be in response to anticipated
          future availability. However, the policies and
          procedures of exporting countries can in-
          fluence availability and create pressure on
          prices.




          ID-77-34                                      OCTOBER 28, 1977
              COMPTROLLER GENERAL OF THE UNITED STATES
                         WASHINGTON, D.C.   20148




3-1 7Tn




To the President of the Senate and the
Speake. of the House of Representatives

     This report discusses our review of coffee  roducinq
and marketing systems.  We made this review at the request
of the Chairman of the Subcommittee on Domestic Marketing,
Consumer Relations and Nutrition, House Committee on
Agriculture.

     To expedite the issuance of this report, the Chairman's
office requested that formal comments not be obtained.   How-
ever, the report has been discussed with representatives of
the Departments of State, Commnerce, and Ariculture, and
their comments were considered in the report.

     Copies of this report are being sent to the
Secretaries of Agriculture, Commerce, State, and the
Treasury, and other parties.




                                ACTING Comptroller General
                                       of the United States
COMPTROLLER GENERAL'S                    COFFEE:  PRODUCTION ANL
REPORT TO THE CONGRESS                   MARKETING SYSTEMS

             D I G       S TpE
             Coffee is produced in 53 countries and
             territories and is vital to the economies
             of many underdeveloped countries that pro-
             duce it.  In 1976 its export value was more
             than $8 billion, second in value only to
             petroleum in international commodity trade.
             Over half of Colombia's and El Salvador's
             1976 export earnings were from coffee.

            In 1976 the third International Coffee
            Agreement entered into force with the
            United States and 12 coffee exporting and
            23 coffee importing cuntries. The United
            States was also a member of he 1962 and
            1968 Agreements. Notwithstanding certain
            consumer-oriented changes in the 1976
            Agreement, the primary reason for U.S.
            membership in the agreements was to help
            stabilize prices and the export income
            of the developing producing countries,
            which needed to plan and pursue their
            development goals.
            In July 1975, during negotiations for the
            1976 Agreement, devastating frost hit
            Brazil's coffee trees. This reduced
            Brazil's coffee production the next year
            from 23 million 60-kilo bags to 9.6 mil-
            lion bags. Later, other major coffee-
            prodJcing countries experienced reduced
            production due to political and natural
            events. At the time of the frost, world
            stocks of coffee had fallen from over 87
            million bags in 196F to 39 million; U.S.
            inventories of green unprocessed coffee
            had fallen from a normal level of 4 mil-
            lion to 5 million bags to 2.5 million bags.

            News of events that affected supply
            created concern over possible shortages
            and resulted in increased demand and a
            seller's market. Between July 1975 and
            April 1977, green bean prices increased

           Uon
conr dag should be mo.   the rport   i                     ID-77-54
                   noted hereon.                           ID-   -4
from $0.55 to $3.40 a pound, but fell to
around $1.96 a pound in July 1977. The
increasing prices raised the ire of U.S.
consumers but appeared to have no great
effect on consumer demand. Recognizing
that, historically, demand has been in-
elastic within certain limits, wholesalers
and retailers were reluctant, without
knowledge of the limits, to pass the full
cost effect on to consumers.

During the period of price increases, the
price stabilization provisions of the 1976
International Coffee Agreement were not in
effect. The primary stabilization feature
of the agreement is the provision for ex-
port quotas when green bean prices fall to
between 63 and 77 cents a pound, which pro-
tects the price at the low end of the price
range. However, there are no provisions,
such as ceiling price and buffer stocks,
to protect against price increases.
Although fluctuations in the price of
exported coffee appear to be in response
to anticipated availability of coffee,
the policies and procedures of exporting
countries influence availability and create
pressures on price. The use of minimum
export prices, export taxes, and other
measures has occasionally limited the
availability of a country's coffee supply
to the world market.

The Department of State has primary
responsibility for formulating U.S. policy
on coffee and coffee-exporting countries.
It represented the United States in negoti-
ations of the 1976 Agreement with the as-
sistance of the Departments of the Treasury,
Commerce, and Agriculture.  It also repre-
sents the United States in the Interna-
tio.al Coffee Organization, which admin-
isters the 1976 Agreement. Matters
relating to coffee are also brought be-
fore the Economic Policy Group within the
Executive Office of the President.

The Departments of Agriculture and Com-
merce are responsible for monitoring the

                     ii
             coffee commodity situation by collecting
             datc and information on coffee production
             and marketing. Although some gaps and
             weaknesse, exist, data and information
             collected and compiled by the Government
             are sufficient to analyze current supply
             and emand.

             Information is not available, however, to
             reliably forecast future supply and de-
             mand an' the resulting price of coffee due
             to unforeseen natural or political events
             and to the psychological aspect of antic-
             ipation of future availability.

             This review was made at the request of
             the Chairman, Subcommittee on Domestic
             Marketing, Consumer Relations &.ld Nutri-
             tion, House Committee on Agriculture. To
             expedite the issuance of the report, the
             Chairman's office requested that formal
             comments not be obtained.  However, the
             report has been discussed with represen-
             tatives of the Departments of State, Com-
             merce, and Agriculture, and their comments
             were considered in the report.




IT   Sheet
                            Contents


  DIGEST
                                                               i
  CHAPTER

          1     INTRODUCTION
                    Increase in coffee prices
                    Why the review was made                    5
                    Scope of review                            7
                                                               8
       2        INTERNATIONAL COFFEE AGREEMENT
                    Agencies' involvement in                   9
                                             coffee
                      policy
                    Provisions of the coffee              11
                                             agreement
                    Ev!luation of the agreements          12
                                                          17
       3       COFFEE-MARKETING SYSTEMS
                 PRODUCING COUNTRIES    OF
                   Growers                                21
                   Processing and marketing               21
                   Government coffee agencies             22
                   Coffee policies                        24
                                                          25
      4        COFFEE MARKETING IN THE
                 UNITED STATES
                   Imports                                38
                   Processing                             38
                   Distribution                           41
                   Factors that affected                  42
                     consumer prices
                                                          44
   5          COFFEE INFORMATION
                                  SYSTEMS
                  The U.S. Government's
                    in coffee data and role
                                        information
                  Information sources in
                    private sector        the
                                                         57
   6          RESPONSES TO QUESTIONS
                                     PRESENTED
                                                         61
APPENDIX

  I           Letter     ad January 25, 1977, from
                the     rman, Subcommittee on
                Domestic Marketing, Consumer
                tions and Nutrition, House    Rela-
                                            Committee
                on Agriculture, to the
                General                 Comptroller
                                                         64
APPENDIX
                                                           Page
  II       Brazil                                           66
 III       Colombia                                         70
  IV       El Salvador                                     75
      V    Ivory Coast                                     80
  VI       Mexico                                          87
 VII       Principal officials responsible for
             administering activities discussed
             in this report                                91
                          ABBREVIATIONS
ERS        Economic Research Service
FAZ        Foreign Agricultural Service
GAO        General Accounting Office
IBC        Instituto Brasileiro de Cafe
ICO        International Coffee Organization
INMECAFE   Instituto Mexicano del Cafe
NASA       Nati3nal Aeronautics and Space Administration
NCA        National Coffee Association
SAMI       Selling Areas Marketing, Inc.
UNCTAD     United Nations Conference on Trade
             and Development
                          CHAPTER 1

                        INTRODUCTION
     Coffee is produced in 53 countries and territories. Pro-
duction generally flourishes in regions within the temperate
zones of the tropics. Latin American countries produced about
two-thirds of the 73.6 million bags of coffee produced during
the coffee-marketing year 1975-76. '/

     Brazil, which is traditionally credited with about one-
third of world production, accounted for about 31 percent, or
23 million bags, in 1975-76. Colombia, the second largest
producer, retained its usual share of about 12 percent. How-
ever, because of the July 1975 frost damage to coffee trees,
Brazil's estimated share of production for marketing year
1976-77 decreased to 15 percent.

     Table 1 shows production estimates for 1977-78. Brazil's
estimated production of 17 million bags (about 24.2 percent
of the world total) shows that it is recovering strongly from
the devastation of the 1975 frost.



1/The coffee-marketing year is from October through September
  for many countries. For others, including Brazil, the mar-
  keting year is from July through June.
                              Table 1

                      Green Coffee Production
                      and Export Availability
                    Estimates for Marketing Year
                              1977-78
                                        Domestic       Exportable
Producer                Production     consumption     production
                         (thousands of 60 kilogram bags)

Latin America:            45.320           13,044        32,276
     Brazil               17,000            7,000        10,000
     Colombia              9,300            1,400         7,900
     Mexico                4,500            1,500         3,000
     El Salvador           3,000              177         2,823
     Guatemala             2,450              307         2,,43
     Costa Rica            1,390              194         1,196
     Equador               1,285              170         1,115
     13 Others and
     Puerto Rico           6,395            2,296         4,099

Africa:                   18,025            1,332        16,693
     Ivory Coast           4,200               I0         4,140
     Uganda                2,600               22         2,578
     Ethiopia              1,900              725         1,175
     Zaire                 1,450              120         1,330
     Kenya                 1,335               18         1,317
     Malagasy              1,200              140         1,060
     Angola                1,500               60         1,440
     15 Others             3,840              187         3,653

Asia:                      6,235            3,125         3,110
        Indonesia                       -3,00 900         2T
        India              1,760            1,050           710
        5 others           1,475            1,175           300

Rest of world
     3 countries
     including U.S.
     Hawaii                  790               31           759

World Total               70,370           17,532        52,838



Source;     Foreign Agriculture Circular, July 1977. Prepared
            by Foreign Agricultural Service, U.S. Department of
            Agriculture.

                                   2
     Coffee is conceded to have little, if any, nutritional
value and is not essential to the human diet. Nonetheless,
in 1976 it was second in value only to petroleum in inter-
national commodity trade, and it is vital to the economies
of many underdeveloped countries that produce it.

     Coffee provides income to growers, and coffee harvesting,
processing, and marketing is a leading source of employment.
Moreover, foreign exchange earnings from exports provide a
significant source of financing for the import of goods needed
for internal economic development.

     During calendar year 1976, the 18 largest coffee-
producing countries exported coffee valued at $6.9 billion,
which represented about a 95-percent increase over 1975
earnings, as shown in table 2. The value of Brazil's coffee
exports increased by $1.5 billion, or over 156 percent, mak-
ing Brazil the primary beneficiary of higher 1976 prices.




                             3
                Coffee Export Earnings of ICO Members
                       1975 and 1976 (noot
                                         e a)

                                                Value    Percent of
     Producer            1976         1975    increase    increase
                      ---------------- (millions)--------------
Latin America:
   Brazil              $2,398     $     934     $1,464     156.7
   Colombia             1,026         b/744        282      37.9
   Mexico                 413           190        223     117.4
   El Salvador            406           229        177      77.3
   Guatemala              202           159        123      77.4
   Ecuador                208            64        144     225.0
   Dominican
     Republic             103            44         59     134.1
   Honduras               101            57         44      77.2
   Peru                   101            53         48      90.6
   Venezuela               38            21        :17      81.0
          Total         5,076         2,495      2,581     103.4
Africa:
   Ivory Coast            642           320        322     100.6
   Uganda                 298           191        107      56.0
   Ethiopia               155            71         84     118.3
   Angola                 149           158         -9      -5.7
   Malagasy               137            81         56      69.1
   Rwanda                  66            33         33     100.0
          Total         1,447           854        593      69.4
Asia:
   Indonesia              217           100        117     117.0
   India                  142            85         57      67.1
          Total           359           185       174       94.1
         Total 18
           members      6,882         3,534     3,348       94.7
          24 other
            members c/1,242           c/644       598       92.9
Total                c/$8,124   c/$4,178      $3,946        94.4
a/   International Coffee Organization export earnings as
     reported by George Gordon Paton & Co., Inc., June 7, 1977.

b/   Under discussion with the government.

c/   Partial figure--data for three African countries either
     not available or estimated.

                                  4
     Coffee's importance relative to total exports of the
coffee-producing ountries also grew significantly as shown
for seven countries for which statistics were available.

        Percentage of coffee exports to total exports
          Country            1975             1976
        El Salvador          41.1             52.0
        Colombia             48.9             51.9
        Costa Rica           20.6             27.6
        Nicaragua            12.8             22.0
        Brazil               10.8             21.4
        Mexico                6.5             10.0
        Ivory Coast          29.6             33.8
     Increased export earnings should help relieve the drastic
trade deficitssuffered by some of these countries in recent
years. Brazil has experienced trade deficits since 1969,
but in 1974 the cost of its imports more than doubled, from
about $7 billion to $14.2 billion, due primarily to the in-
creased cost of petroleum. This 1974 deficit of about $6.2
billion was folloed by deficits of $4.9 billion in 1975 and
$3.5 billion in 1976. According to Brazil's finance minister,
the first monthly trade surplus ($70 million) in 3 years was
realized in April 1977.
     The United States imports about 37 percent of the world's
coffee imports, making it the largest single importer. The
Federal Republic of Germany, which has consistently imported
about 10 percent since 1972, ranked a distant second with
about 11 percent. The European Economic Community collec-
tively accounted for a ut 40 percernt in 1976.

INCREASE IN COFFEE PRICES

     Unprecedented coffee price increases after the frost
hit Brazilian coffee trees on July 17, 1975, not only raised
the ire of U.S. consumers, but also added to U.S. balance-of-
payments problems already heightened by the high costs of
imported petroleum.  It has been estimated that the U.S. im-
port price for coffee during 1977 may approach $6.5 billion,
almost two and one-half times greater than the $2.7 billion
for 1976.

     Since the 1975 frost, the U.S. imported price of green
coffee soared from about $0.55 to $3.40 a pound in mid-April
1977 and wholesale prices rose from about $1.21 to $4.46 a
pound. However, after hitting those mid-April peaks, green
coffee prices declined to $1.96 a pound by the end of July.


                              5
Events leading to price increases

     High levels of production and increasing supplies during
the first half of the 1960s were reflected in exceptionally
low prices. The United States was importing green coffee at
less than 40 cents a pound and producing countries began to
diversify their crops and move their economies away from de-
pendence on a single commodity. Brazil, for example, reduced
both the numbers of trees and acreage in coffee production
by almost 50 percent between 1960 and 1970. Consequently,
its annual production, which averaged 30.5 million bags dur-
ing the first 3 years of the 1960s, was reduced about one-
third, to an annual average of 20.7 million bags over the
last 3 years of the decade.

     This move by Brazil had a significant impact on world
production, which averaged about 72.2 million bags during
the early 1960s, while annual requirements were about 57.1
million bags. This situation, which was gradually increas-
ing world stocks, began moderating after 1963 and was re-
versed in 1966 when annual world requirements began to aver-
age about 69.1 million bags and production averaged about
63.4 mil-ion bags. As shown below, this reversal and resul-
tant stock depletion has continued into the mid-1970s.

                                                    Increase in
  Marketing years        Production   Requirements stock levels
                            (millions of 60 kilogram bags)
1959-60   to   1961-62      72.2         57.1          15.1
1963-64   to   1965-66      67.7         62.4           5.3
1966-67   to   1968-69      63.4         69.1          -5.7
1969-70   to   1971-72      65.8         73.1          -7.3
1973-74   to   1975-76      71.8         75.4          -3.6
Source:   Annual Coffee Statistics, Pan American Coffee Bureau
     As world production had not kept pace with consumption
since the mid-1960s, record-level stocks of 83 million bags
held by producers were reduced to about 39 million bags by
mid-1975, te lowest level in 18 years. Based on the average
rate of exports and producers' domestic requirements for the
3 preceding years, stocks were reduced from a 69-week supply
to about a 26-week supply.

     The July 1975 frost in Brazil killed or damaged some 1.5
billion coffee trees (96 percent of the trees were affected
in the State of Parana, Brazil's principal producing state).
Events in other countries were also disrupting future produc-
tion expectations--a civil war in Angola, adverse weather in


                                   6
Colombia, an earthquake in Guatemala, and, more
coffee rust in Central America. Consequently, recently,
events affecting supplies or production exerted any news or
pressure on prices.                              an upward

     Though stocks continued to decline, the rate
                                                   has slowed
considerably as production has returned to early
Surplus production is again ex-ected with the     1960 levels.
                                              harvesting of
Brazil's '978-79 crop, when new trees planted
                                              after the frost
come into production.
WHY THE REVIEW WAS MADE

     Price increases of over 250 percent
years created a movement within the Unitedin States
                                              less than 2
                                                     for a con-
sumer boycott against coffee consumption, and
of State and private U.S. coffee roasters were  the  Department
not taking more forceful action to slow or lower criticized   for
ing trends. The Subcommittee on Domest"- Marketing, these  pric-
Relations and Nutrition of the House Co ittee           Consumer
                                                 on Agriculture
held hearings during March 16 and 18, 1976,
                                              and held joint
hearings with the Subcommittee on Commerce, Consumer,
Monetary Affairs of the House Committee on Government and
tions on February 22 and 23, 1977.                        Opera-

     In a January 25, 1977, letter, the Chairman,
on Domestic Marketin, Consumer Relations and      Subcommittee
                                              Natrition,
House Committee on Agriculture, asked us to examine
eral Government's coffee information collection     the Fed-
seek to determine whether such information is   efforts  and
                                              sufficient to
analyze supply and demand. As an integral part
the Chairman asked that we review:              of our efforts,

     -- Interagency mechanisms for monitoring the coffee
                                                         com-
        modity situation and for formulating and coordinating
        U.S. policy with regard to coffee and coffee-exporting
        countries.

    --The International Coffee Agreement and, to
      possible, analyze its merits and weaknesses.the extent

    -- Marketing policies and procedures of the 18
       suppliers of coffee to the United States, thelargest
                                                      ramifi-
       cations of these policies and procedures on domestic
       coffee prices, and the interrelationship of
                                                   U.S. proc-
       essors with the marketing system.




                               7
SCOPE OF REVIEW

     To meet the requirements of the request, we conducted
studies in five countries that supplied over 51 percent of
U.S. coffee imports during 1976--Colombia (16 percent),
Brazil (15.6 percent), Mexico (10.2 percent), El Salvador
(4 percent), and Ivory Coast (5.5 percent). With Subcommit-
tee staff concurrence, we attempted to develop information
on coffee activities of the other 13 largest U.S. suppliers
from data available in the United States. Collectively, the
18 countries selected provided over 90 percent of 1976 U.S.
coffee imports.

     Our work in the United States focused principally on
activities of the Departments of State, Agriculture,
Commerce, and the Treasury, but we also developed informa-
tion through contacts with the National Aeronautics and Space
Administration, Commodities Futures Trading Commission, World
Bank, Congressional Research Service, Central Intelligence
Agency, the National Coffee Association (NCA), the World Cof-
fee Information Center, and private U.S. importers, brokers,
wholesalers, and retailers.

     Our overseas work at U.S. Embassies was supplemented
by field visits to observe growing areas and handling and
storage facilities. In addition to U.S. officials, our con-
tacts included appropriate representatives of producing coun-
try governments, private growers, fieldhands, cooperatives,
warehousers, and exporters.

     Much of our work on the International Coffee Agreement
was conducted at the U.S. Embassy and the International Cof-
fee Organization (ICO) Headquarters in London, England.

     In the United States we worked principally in Washington,
D.C., and vicinity, but interviews were also held in New York,
New York, and Boston, Massachusetts.




                             8
                           CHAPTER 2
                INTERNATIONAL COFFEE AGREEMENT
     On October 1, 1976, the third International
Agreement entered into force                     Coffee
                             with the United States as a mem-
ber. The United States was also a member
                                          of the 1962 and
1968 Agreements. Forty-two coffee-exporting
importing countries are currently members    and 24 coffee-
                                          of the 1976 Agree-
ment, representing about 99 percent of
about 91 percent of coffee imports.    coffee exports and

      The 1976 Agreement is scheduled to
1982, and members must notify the U.N. expire on September 30,
ing the 12 months preceding September Secretary General dur-
tention to participate in the second 30, 1979, of their in-
                                      3 years of the agreement.
Congressional approval was required for
become a member of the agreement, and    the United States to
                                       the
has committed itself to seek congressional Department of State
                                            approval to partic-
ipate in the second 3 years of the agreement.
States and other members can withdraw           The United
                                       from the agreement at
any time by notifying the U.N. Secretary
                                          General.
    The objectives of the agreement are:
    "(1) to achieve a reasonable balance
                                         between world sup-
    ply and demand on a basis which will
    supplies of coffee at fair prices to assure adequate
                                         consumers and mar-
    kets for coffee at remunerative prices
                                           to producers and
    which will be conducive to long term equilibrium
    production and consumption;                      between

    (2) to avoid excessive fluctuations in
    world supplies, stocks and prices which the levels of
                                             are harmful to
    both producers and consumers;
    (3) to contribute to the development
                                          of productive
    resources and to the promotion and maintenance
    ment and income in Member countries,             of employ-
    bring about fair wages, higher living thereby helping  to
                                           standards  and bet-
    ter working conditions;
    (4) to increase the purchasing power
                                         of coffee-exporting
    countries by keeping prices in accordance
    visions of paragraph (1) * * * and        with the pro-
                                       by increasing consump-
    tion;
   (5) to promote and increase the consumption
   by every possible means; and                of coffee



                             9
     (6) in general, in recognition of the relpaionship of
     the trade in coffee to the economic stability of markets
     for industrial products, to further international coop-
     eration in connection with world coffee problems."

     These objectives reflect the reasons that exporting and
importing nations became members.  Exporting nations.face a
commodity market in which production responds very slowly to
price changes. High prices stimulate increased plantings
which increase production 3 to 5 years later.  When produc-
tion increases it tends to force prices downward. Since the
new trees produce for 15 to 20 years, production stays high
despite the resulting low prices.  In 1954 coffee prices were
at record peaks, which prompted expanded plantings.  Prices
began moving downward shortly thereafter, and the threat of
further falling prices prompted producers to adopt a series
of price maintenance arrangements which culminated in the
1962 Coffee Agreement.

     Importing countries joined the agreements for reasons
in addition to their own economic interests. The United
States joined primarily to help stabilize the export income
of over 40 developing coffee-producing countries which needed
to plan and pursue their development goals. The Unitad States
was already committed to the economic development of many of
these countries through U.S. programs and the Alliance for
Progress.    secondary reason was to help secure for consumers
an adequate coffee supply at reasonable and stable prices.

     President John F. Kennedy, in connection with the 1962
Agreement, stated that:

     "The Agreement is a heartening example of international
     cooperation to resolve a vitally important economic prob-
     lem.  Coffee is the third most traded commodity in the
     world and is the main source of foreign income in many
     underdeveloped countries, particularly in Latin America.

     A drop of one cent a pound for   green coffee costs Latin
     American producers $50 million   in export proceeds enough
     to seriously undermine what we   are seeking to accomplish
     by the Alliance for Progress *   * *."
     President Lyndon B. Johnson, in connection with the 1968
Agreement, said that:

     "Through the International Coffee Agreement the machinery
     for economic cooperation is now in place--tested over
     the years and now improved. Without that machinery, we
     could return to the days of ruinous coffee price swings,


                             10
      disrupting the economics of many friendly
                                                 nations,
      impairing world coffee trade, and endangering
      tinued flow of coffee at reasonable prices     the con-
      of American families * * *."                to the tables

       During negotiations for the 1976 Agreement,
 of the July frost changed the principal               the occurance
 fee market from excess supplies and low concerns of the cof-
                                            prices for producers
 to critically short supplies and the
 for consumers. The increased consumer  threat   of high prices
changes in the 1976 Agreement reflect    orientation    of the
                                         the new concerns. When
President Ford recommended that
providing for U.S. participation the
                                   in
                                       Senate ratify the treaty
                                       the 1976 Agreement, he
highlighted the consumer-oriented changes
                                              and described the
agreement as one which would mutually
                                         benefit producers and
consumers. Nevertheless, it appears
                                        that economic consider-
ations for the coffee-producing countries
mary reason the United States entered         were still the pri-
                                         into the 1976 Agreement.
      When the United States considers whether
participation in the second 3 years of             to continue its
                                          the
decision may be measured against a specific agreement, the
criterion established by P:-sident Carter       consumer-related
                                              in his April 15,
1977, anti-inflation progr .t--whether
                                         the agreement, by
reducing fluctuations in commodity prices,
inflation.                                     reduces U.S.

AGENCIES' INVOLVEMENT   N COFFEE POLICY
      The major negotiations for the 1976 International
Agreement were held in London in April,                    Coffee
1975. The Department of State was the    July,   and  November
                                        primary U.S. represen-
tati'a in these negotiations and was assisted
Comr.erce, and Agriculture representatives       by the Treasury,
the negotiating team. Also, it received     who  were members of
                                           input
tional Coffee Association (NCA) representing      from the Na-
sector. Before and during the negotiations,     the  industry
of a U.S. international coffee policy           the  development
                                       required   regular  and
frequent communication between State and
ments.                                     the other   depart-

     The former cabinet level Economic
established a special commodity policy Policy Board had
                                        group, co-chaired by
State and the Treasury, with various
                                      subgroups  devoted to
specific commodities, such as coffee.
was a working-level staff, representing The  coffee subgroup
sible for coffee policy.                 the  agencies respon-

     Since the United States joined the 1976
                                             Agreement, the
Department of State has had primary responsibility
concerning coffee and the coffee-producing         for policy
                                           nations. State's

                              11
representative to the International Coffee Organization (ICO)
handles administrative and technical matters of the agreement.
The Departments of the Treasury, Commerce, and Agriculture,
as well as the private sector, consult with and provide tech-
nical advice to State.

     Although interagency coordination is conducted infor-
mally, a Commodities Task Force was established in May 1977,
under the Economic Policy Group of the Executive Office, to
deal with commodity issues that require fast decisions and
frequent attention. T     task force is chaired by State and
composed of representative: at the assistant secretary level
from nine executive agencies

     At inception it was tas., to present an initial report
to the Economic Policy Group by early June on the status of
commodities, including coffee, listed under the U.N. Confer-
ence on Trade and Development (UNCTAD) integrated program.
The subgroups that have been set up include one on sugar and
another on the UNCTAD common fund proposal, which have met
regularly. Issues regarding coffee have been discussed even
though they are not presently covered by a special subgroup.

     NCA channels the trade position on ICO issues to the
State Department through is Foreign Affairs Committee, which
was established in the mid--1950s. At that time coffee prices
were plummeting as a result of increased production following
the 1953 frost, and there was much discussion of interna-
tional agreements and buffer stocks. The NCA created its
Foreign Affairs Committee to look into the possibilities and
implications of such agreements.

     Since the 1962 International Coffee Agreement, the For-
eign Affairs Committee has been the formal voice for communi-
cating industry views to the State Department. Throughout
the last 20 years it has had periodic input to Government
policymaking for the international coffee situation. The
Committee meets about 3 or 4 times   year as issues requiring
discussion arise.  About once or twice a year, it receives
requests from Government sources and meets with Government
representatives.

PROVISIONS OF '., COFFEE AGREEMENT

     The Coffee Agreements have been considered successful
in achieving their objectives in that they have

     -- reduced surplus stocks which had been depressing
        prices,


                             12
      -- helped to provide consumers coffee at lower prices
         than at peaks reached prior to the agreements,

      -- provided producers with relatively stable foreign
         exchange without disastrously low prices which would
         have hindered their long-term development programs,
         and
     -- worked toward a supply/demand balance.
     As the agreements have been primarily concerned with
excess supplies and low prices, they have relied primarily
export quotas and to a lesser extent on production goals      on
                                                            to
balance supply and demand, but have never used a buffer stock.
Consumer countries have not wanted
which could cost over $1 billion to tobe finance a buffer stock.
                                          effective. 1/ Producer,
government, and privately held and financed stocks are all
that is available under the agreement as insurance against
pr)duction shortfalls.
     The 1976 Agreement uses quotas and production goals
differently than the 1968 Agreement. The 1968 Agreement
                                                          had
continuously operative export quotas. The quotas were estab-
lished prior to the beginninrg of each coffee year based
projections of world demand and other factors. The 1968 on
Agreement also attempted to establish a basic demand-supply
balance through a mandatory production policy which encour-
aged producers to establish by December 31, 1963,  production
targets such that the combined production from all producers
would approximate the agreement's estimate of 1972-73 world
demand. The agreement encouraged producers to cooperate
                                                          in
setting production goals through (1) providing that produc-
tion in excess of a country's uota could not be exported
and (2) providing for a diversification fund to help finance
their efforts to move out of coffee and into other areas
                                                          such
as meat and dairy products.

     The 1976 Agreement provides for quotas to be put into
effect when prices fall to between 63 cents and 77 cents
                                                         a
pound unless the agreement's governing body provides other-
wise. The 63-cent price will trigger quotas if prices
decline gradually over a long period of time; prices closer
to 77 cents will call forth quotas if prices decline rapidly.



1/Treasury Department estimate based on 15 million bags
  50 cents a pound; other estimates for stock size range at
                                                          up
  to 30 million bags.



                             13
     The 1976 Agreement has a voluntary rather than mandatory
production policy and a provision, as yet unused, to create
a voluntary diversification program.
The International Coffee Organization

     ICO was established under the 1962 Agreement and
is headquartered in London, England. It comprises the
International Coffee Council, an executive board, and an
executive director and his permanent staff of international
civil servants.

     International Coffee Council
     The council, consisting of all members of the agree-
ment, (1) approves the administrative budget, (2) decides
disputes, (3) establishes and adjusts annual quotas, (4)
establishes price ranges which trigger the imposition and
removal of quotas, and (5) can suspend member voting rights.

     Decisions and recommendations are made through member
voting, and importing members and exporting members each
have a block of 1,000 votes. Within the blocks, each member
has a small equal number of basic votes, with the remainder
allocated proportionally according to the quantity of imports
or exports to importing members. The United States is the
largest importer and has 353 votes, the largest number of
votes in the importing block. Brazil is the largest exporter
and has 319 votes, the largest number of votes in the export-
ing block.

     Unless otherwise provided, all decisions and recommenda-
tions require a simple majority vote of both importing and
exporting blocks, taken separately. A two-thirds majority of
both producers and consumers is required, among other things,
to

    -- exclude a member from ICO,

    -- terminate or amend the agreement,
    -- delegate certain council powers to the executive board,

    -- set global annual quotas,
    --adjust quotas on the basis of market conditions or as
      necessary hen membership is increased,

    -- establish a price range to trigger the imposition of
       quotas, or


                             14
       -- override the automatic procedure for suspending Quotas.

     With more than one-third of the importing member votes,
the United States and one other consumer member can veto
                                                          pro-
posed council actions which require two-thirds vote.   One other
member must join with the United States because the aareement
has a procedure for blocking an attempted veto by only one
member with over one-third of the consumer or producer
                                                        votes.
       Executive board

     The board, composed of eight exporting and eight import-
ing members, functions principally as the working group
                                                         of
the council.  It deals with the issues for which the council
is responsible and recommends courses of action to the
                                                        coun-
cil.

       Executive director

     The executive director and his staff administer the pro-
visions of the agreement.  The executive director, for exam-
ple, set3 ::7ort quotas when the trigger prices are reached.
The staff gathers, develops, and publishes statistics concern-
ing coffee commerce.

       Data and information

     Whether a commodity agreement relies on   buffer stock,
quotas, or production goals, it needs a reliable data base,
which includes estimates of current and future demand, pro-
duction, and exports needed to set individual and global
                                                         quo-
tas and production goals.

      Two currently critical statistical series which ICO
publishes are production estimates and stocks in producing
countries. For it, estimates of production, ICO uses the
projections submitted by producing-member countries.   Although
it also uses U.S. Department of Agriculture production esti-
mates and may question producers about differences between
their estimates and those of Agricu'.ture, ICO must accept
producer country estimates.

     The estimate of stocks is developed quite differently.
The 1976 Agreement has a special producer-financed fund
                                                        which
ICO uses to retain a private firm to independently verify
stocks.  The firm's  epresentatives physically count bags of
coffee in all previously specified and approved warehouses
                                                            in
all member exporting countries, except when exporting members
certify that warehouses contain less than 1,000 bags (500
bags for members producing small amounts of coffee) or when
members' stocks are less than 2 percent of their exports.

                              15
     The inventorying firm counts stocks at the end of the
quarter preceeding the beginning of the new crop year.
Because there are three distinct harvest periods, there are
three corresponding inventory periods--March 31, June 30, and
September 30.

     The objective is to ccunt coffee stocks available at the
end of a country's coffee-marketing year. The count includes
working stocks but excludes coffee (1) held on the farm, (2)
in transit, and (3) from the new year's harvest.

     The producer-financed special fund, which came into
existence for the 1976-77 crop year, changed the procedure
for financing the counting of inventories. Previously, pro-
ducers paid directly for verification in their countries.

     In addition to the production and stock series, ICO
publishes daily indicator prices for green coffee imports.
The indicator price under the 1968 Agreement was the average
of prices for Colombian and other milds, Brazilian unwashed
arabicas, and African robustas. During the negotiations for
the 1976 Agreement, the averaging basis was changed to exclude
the Colombian and BrFzilian coffees. When supply was plenti-
ful, prior to the Brazilian frost and other natural and polit-
ical disruptions, Colombian and Brazilian coffees were selling
at a substantially higher price than the rest of the world's
coffees. In order to compete, these countries discounted the
price for buyers' agreements on future purchases of a certain
volume. As a result, the quoted prices were generally not
the real prices at which these coffees sold. As these pro-
ducing countries had such a large share of the world market,
variations from the real price distorted the indicator price.
ICO presently publishes both a 1968 and 1976 Aqreement-based
indicator price.

     ICO also administers the special fund which the 1976
Agreement established to p:omote "consumption in importing
countries by all appropriate means without regard to origin,
typo or brand of coffee, and of achieving and maintaining the
higlest quality and purity of the beverage." The fund con-
tinues the work of the 1968 Agreement's special promotion
committee. The principal difference between the two is that
contributions were voluntary under the 1968 Agreement but are
mandatory for producers under the 1976 Agreement.
     Congressional hearings in 1976 questioned the wisdom of
trying to increase demand for coffee during a period when
tight supplies were already pushing up prices. The Deputy
Director of ICO told us that plans for a U.S. promotion
program have been shelved because of the supply situation.

                             16
Longstanding programs in Switzerland and Norway are being
funded at about $295,000 and $225,000, respectively. An ICO
press release described the Swiss program as an effort to
promote coffee consumption. The purpose of Norway's program
is to improve the quality of the coffee and to increase both
total and per capita consumption. The press release also
pointed out that a campaign in Austria was being considered.
EVALUATION OF THE AGREEMENTS
     In 1969 and 1973 we reported on our examinations of the
1962 and 1968 Coffee Agreements. 1/ These reports pointed out
that the agreements. as a result of causing consumers to pay
higher prices than they would in the absence of the agreement,
provided econoinic aid to producing countries without congres-
sional approval. Subsequent higher prices reduced the applic-
ability of this conclusion to the current agreement. The
Senate has approved U.S. participation in the extension of
the 1968 Agreement and in the 1976 Agreement, and the Congress
has approved funds for the U.S. share of ICO annual bud-
get. It appears, therefore, that the Congress has recognized
that consumers may pay higher prices for coffee under the
agreements and that the higher prices represent assistance to
the producing countries.

     Consumers were paying higher prices for several reasons.
First, the continuously effective quotas restricted supply
and prevented prices from falling and remaining as low as
they would have without the agreements. Second, removal of
quotas required council approval, a time-consuming process
which slowed down the expansion of supply during periods of
rising prices. Prices therefore rose higher and more rapidly
than they would have if supplies had been more readily avail-
able to the market. Third, the agreement provided a frame-
work in which exporters could increase prices by undershipping
their quotas without fear that other producers, also subject
to quota, could nullify their actions by increasing exports.



l/Foreign Aid Provided Through the Operations of the United
  States Sugar Act and the International Coffee Agreement,
  Oct. 1969 (B-167416).

 The International Coffee Agreement and ts Impact on Coffee
 Prices, and the Ability of the International Coffee Agree-
 ment to Deal with Unforeseen Supply and Demand Conditions,
 Mar. 1973 (B-175530).



                               1.7
     The 1976 Agreement contains several improvements over
prio: agreements which could benefit consuming countries.
The 1976 Agreement provides that quotas will not come into
effect until prices fall to trigger levels of between 63 and
77 cents unless the council decides otherwise. In the absence
of quotas, any increase in supply tends to push prices toward
the trigger levels. It provides also for quotas to be auto-
matically suspended if prices for 20 consecutive market days
are 15 percent above the ceiling of the price range estab-
lished by the council, or 15 percent or more above the aver-
age composite indicator price recorded during the preceding
calendar year. A private contractor to ICO establishes the
indicator price based on daily prices for robusta coffees
and mild arabica coffees other than those from Brazil and
Colombia.

     U.S. representatives reportedly tried unsuccessfully to
negotiate into the 1976 Agreement a penalty for exporters who
purposely undership their quotas to restrict supply and raise
price. However, an interagency analysis of the coffee agree-
ments pointed out that the 1976 Agreement's provision for auto-
maticlly suspending quotas will limit the effectiveness of
intentional undershipments. The negotiators did establish an
incentive fo. exporting members to declare expected undership-
ments to ICO in the first half of the coffee year by pro-
viding for the reporting country's quota to increase in the
succeeding year by 30 percent of the undershipment declared.
Early reporting is helpful because quota increases for other
exporters can make up for anticipated shortfalls.

     The 1976 Agreement contains other consumer-oriented
changes unrelated to matters discussed in our prior reports.
The July 1975 frost hit Brazil while negotiations for the
agreement were still in progress. U.S. negotiators, realiz-
ing that available supplies would be tight for the agreement's
first 2 to 3 years, tried to modify the agreement to encourage
the largest possible exports during those years. To provide
this encouragement the agreement specifies that 70 percent of
a member's export quota will be based on its exports during
specified periods. Quotas introduced during coffee year
1976-77 wouJd be based on exports in coffee years 1968-69 to
1971-72; quotas during coffee year 1977-78 on exports in
1968-69 to 1971-72 or 1976-77, whichever is higher; and quo-
tas in 1978-79 or later on exports in 1968-69 to 1971-72 or
1976-77 and 1977-78.

     The agreement provides that only exports to importing
members of the agreement will be counted in determining an
exporter's quota. During 1976 Brazil attempted to purchase
coffee from other exporters in apparent excess of its domestic

                             18
needs. Although Brazil stated that the the imports were for
its soluble coffee industry, others, including State Depart-
ment officials, contended that the purpose of the imports was
to shore up sagging prices. The State Department used this
provision in its attempts to discourage exporters' sales to
Brazil so that these supplies would be available to importing
countries.
     The 1976 Agreement provides also that an exporting
country's stock level in relation to world stocks will deter-
mine 30 percent of its export quota. This will allow pro-
ducer countries, especially the more efficient, to increase
their quotas during the course of the agreement. If this
provision encourages producers to hold stocks at their own
expense, such stocks will provide protection against high
prices for consumers during periods of reduced production.
In addition, producer-financed stock will spare consumer
countries the expense of financing a buffer stock to provide
the same kind of protection. Using stocks to establish
export quotas increases the mportance of reliable stock
figures.

     The 1976 Agreement removes provisions of the 1968 Agree-
ment which might have encumbered imports. The 1968 Agreement
required a member to (1) prohibit the entry of coffee from
another member which was not accompanied by a Certificate of
Origin or of Re-export issued in accordance with council-
established rules and (2) limit its annual imports of coffee
produced in nonmember countries to average annual imports of
coffee from those countries during calendar years 1960-62.
The 1976 Agreement provides that when quotas are suspended,
as they currently are, consumers are not obligated to exclude
coffee from any source.

     Since its inception, the 1976 Agreement has had no
effect on the supply and price of coffee   As prices have
been significantly above the trigger levels, quotas have not
been in effect. The principal mechanism a commodity agree-
ment can use to slow price increases is a buffer stock, which
the agreements have never had. Also, the agreement does not
provide for a price ceiling.

     An unresolved question is whether past coffee agreements
have affected prices through their long-term impact on supply.
Some say the agreements' protection against excessively low
prices has maintained investments in coffee and thus kert
production higher and prices lower than they would otherwise
have been. Others argue that the agreements, through their
production policy, have caused supplies to be lower and prices
higher than they otherwise would.


                             19
     Overall, the agreements probably depressed coffee pro-
duction through July 1975. Although the protection against
low prices may have stimulated some individual producers to
maintain or even increase production, the agreement's diver-
sification fund and production policy apparently kept total
production low enough to reduce stocks from 83 million bags
in 1965 to about 3 million bags before the July 1975 frost.

     However, it is possible also that the agreement depressed
production less than it would have been in the absence of an
agreement. Without an agreement, prices may have fallen
lower, causing a greater drop in production than resulted from
the mandatory production policy and the diversification fund.




                            20
                             CHAPTER 3
          COFFEE-MARKETING SYSTEMS OF PRODUCING COUNTRIES
     Coffee-marketing systems of the producing countries
essentially consist of growers, processors, brokers or other
intermediaries, domestic roasters, exporters, and either a
government or quasi-government agency charged with carrying
out country coffee policies. Such policies may be directed
toward any number of primary objectives--from controlling
production, inventories, and exports to allocating revenues,
maximizing government revenues, and curbing inflation. Most
policy implementations have rippling effects that ultimately
influence prices to consumers.

     Members within each element of the marketing system may
perform more than one marketing function. Some growers handle
coffee from harvest through export, and some processors handle
both processing and exporting functions.

GROWERS

     Coffee production is a labor-intensive operation and is
limited mainly to developing countries with agrarian econo-
mies. Consequently, there are numerous growers with rela-
tively small operations, as shown below.

                             Hectares in
                 Number      production     Average number of
  Country      of growers     (note a)     hectares per grower
Brazil      b/300,000       b/2,700,000           9.0
Colombia      302,945         1,100,000           3.6
El Salvador    40,779           147,000           3.6
Mexico         97,716           356,253           3.6
Ivory Coast   350,000           760,000           2.2
a/One hectare equals 2.47 acres.

b/Brazilian Coffee Institute statistics for 1975.

     In the Ivory Coast, most coffee trees are scattered among
other crops on small plots of less than 5 hectares, and it is
estimated that oriy 1 to 2 percent of the coffee is produced
on large plantations. In Brazil, Colombia, and Mexico, less
than 3 percent of the growers are considered large-scale
operations.  In El Salvador, on the other hand, 4 percent of




                               21
the farms (some 1,564) average 63 hectares and produce over
67 percent of the coffee.

     Harvesting seasons vary from country to country, lasting
only a few months in some, but practically all year in otheLs.
In Brazil, where the harvest lasts from May to September, all
coffee cherries, reflecting separate tree flowerings, are
stripped from the tree limbs at the initial picking. In other
countries, separate harvestings coincide with the ripening of
the coffee cherry. Although Brazil's practice saves harvest-
ing costs, it is felt that there is some sacrifice of quality.

     All coffee is harvested by hand, providing employment
to thousands.  In Colombia, 10 percent of the population is
employed in the production of coffee. However, fieldhands'
pay remains at relatively low levels. Daily wages in
Colombia rose from $1.55 in 1975 to $2.52 in early 1977; in
Brazil daily wages in 1976 ranged from $3.76 to $7.52.

     To help allocate income within the coffee sector and sta-
bilize income to the grower, producing countries set minimum
internal prices to growers in conjunction with export taxes
and minimum export registration prices. To make the system
enforceable, government coffee agencies will buy at the mini-
mum price, forcing buyers to pay either that minimum or a
higher price. Because of demand in the postfrost period,
buyer prices have in some cases exceeded minimum levels. In
early 1977 minimum prices set or growers and the prices
being paid by buyers were as fellows.

                    Minimum          Price a pound
  Country        price a pound       paid by buyers
Brazil               $1.13                $2.27
Colombia               .70                  .88
Mexico                1.38                 1.38
El Salvador           1.82                 1.82
Ivory Coast            .35                  .35
PROCESSING AND MARKETING

     Coffee beans are processed by sun-drying and removing
the husks by hand or machine or by soaking, fermenting, and
removing the husks in water and then drying the beans before
they are machine cleaned. Most growers have little capability
to process coffee beyond the sun-drying stage. Normally, it
is delivered to a processing facility, which may be privately
owned and operated to provide only that service, or may be
owned by grower cooperatives, exporters, or government agen-
cies that perform additional marketing functions.


                             22
     Cooperatives, for example, in addition to processing, may
assist members with storage, arrange for loans to growers,
sell coffee to exporters, or export independently.  Represen-
tatives of a cooperative in Brazil stated that they wr,
involved in an effort to develop an annual export capacity of
2.5 million bags or about 20 percent of Brazil's 1976 exports.

     Brokers and other intermediaries, acting on their own
behalf or as agents of exporters, importers, or roasters,
may buy and sell coffee at any point in the marketing chain.

     Exporters, however, are generally the principal movers
of coffee from the field to international markets. They buy,
process, transport, store, sell, and ship.

     A few exporters handle the bulk of Ivory Coast shipments
serving merely as brokers for the government's coffee agency
at a fixed rate of remuneration.

     Government coffee agencies in El Salvador and Mexico
compete with private exporters for available supplies and
accounted for 40 and 15 percent, respectively, of 1976-77
coffee exports.  In contrast, Brazil's coffee agency has not
purchased coffee domestically since 1974, though sizable
exports were made from stocks acquired in earlier years.
Brazil controls exporters and the marketing of coffee abroad.

Contraband

     The volume of coffee smuggled out of producing countries
to avoid taxation and/or low internal prices is not actually
known, but it was estimated that as much as 1 million bags,
or 13 percent, of the coffee leaving Colombia in 1976, may
have been in the form of contraband. About 6 percent of cof-
fee leaving the Ivory Coast was estimated to be contraband.
In both cases, prices set for growers were substantially
below world prices. High export taxes and foreign exchange
requirements were believed to be other contributing factors
in Colombia.

     In Mexico it was reported in March 1977 that 100,000
bags, costing the government about $10 million in revenues,
had been smuggled out of the country.

     Smuggling not only deprives the governments of needed
revenues but may also keep the countries from establishing
true export quotas under the International Coffee Agreement.
Consequently, government measures have been taken to control
the practice. Colombia restricted the routes over which
coffee could be moved and designated the military to enforce


                             23
the restrictions. It intends to establish committees at each
port to review export documents, because most contraband was
leaving the country by documents which understated the amount
exported.

GOVERNMENT COFFEE AGENCIES

      Government or quasi-government agencies responsible for
implementing country coffee policies do not function as pro-
ducers, but most all buy, sell, store, and export coffee; in
El Salvador and Mexico, they also operate processing facili-
ties.

     Coffee agencies in the various countries are listed
below.

     Instituto Brasileiro do Cafe (IBC)    The Brazilian Cof-
      t!e Institute is organizationally under the Ministry of
     Industry and Commerce, and implements policies estab-
     lished by the National Monetary Council.

     Federacion Nacional de Cafeteros de Colombia   The
     Colombian National Federation of Coffee Growers was
     created as a trade union with the central purpose of
     supporting coffee farmers. The Federation, either
     acting alone or in conjunction with the Monetary Board,
     sets policies and is responsible for implementing those
     policies.
     Compania Salvadorena de Cafe S.A.   The El Salvador
     Coffee Company implements policies established by the
     six-member board of directors of the National Coffee
     Department (Departamento Nacional del Cafe)

     Instituto Mexicano del Cafe (INMECAFE) The Mexican
     Coffee Institute implements policies established by its
     own 10-memter board of directors.

     Caisse de Stabilisation des prix (Caisse)   The Caisse
     is a state trading corporation o the Ivory Coast that
     works to stabilize income for eight co,modities, includ-
     ing coffee.

     These agencies are responsible for the well-being of
their countries' coffee industries. In times of large supply
and low prices, they buy coffee and assume storage costs when
growers cannot find buyers willing to meet minimum established
prices. They allocate coffee earnings by setting minimum
prices to growers, export tax rates, and minimum registration
prices for exports. They use export revenues principally to


                             24
conduct research, buy and store coffee, subsidize the domestic
industry, finance operations, construct facilities and public
works, and promote production.

COFFEE POLICIES
     In the sellers' market following the 1975 frost, produc-
ing countries have endeavored to implement policies perceived
to best serve their interests. Countries with more advanced
economies, which are also the largest coffee producers, have
been particularly anxious to increase their foreign exchange
earnings and lessen the burden of petroleum price increases
since the third quarter of 1973.1/

     The era of high prices has been accompanied in some
producing countries by inflaion and fear that higher prices
will encourage overproduction, driving prices once again
                                                         to
rockbottom levels. Governments have dealt with these issues
by trying co influence production, supply, and price.

Production expansion
     Concern that high prices will lead to overproduction
may be causing producing countries to exercise caution
                                                        in
offering assistance to stimulate production. Most efforts
have been directed toward improving farming techniques,
rather than increasing coffee acreage.

     The Ivory Coast Government provides free fertilizer and
pesticides to growers and finances research on new tree
eties. Brazil, Colombia, and Mexico provide loans to     vari-
                                                       growers
at below-market rates to encourage use of fertilizers, pesti-
cides, improved planting and cultivation techniques and
replacement of older trees with new, higher yield varieties.
Brazil instituted a $1-billion program to rest,)re production
to pre-frost levels of about 26 million bags, and Mexico
providing $200 million over the next 6 years to increase is
duction from a present 4 million bags to 7 million bags pro-
coffee year 1981-82. Colombia authorized $80 million forby


l/Petroleum exporting countries quadrupled the price of
                                                         oil
  in late 1973. Subsequent increases have followed and
  Brazil, pursuing ambitious development projects, has been
  exceptionally hard hit. The cost of Brazil's petroleum
  imports increased from $986 million, 14 percent of total
  imports in 1973, to over $4 billion, nearly 30 percent
  of imports in 1976.



                             25
expansion projects and plans to increase acreage over the next
2 years by 30,000 hectares to reach a production goal of 11.4
million bags by 1980.
     The trend throughout the countries is toward new, higher
yield trees which are smaller than the normal 12 to 15 feet
of older trees. Thus, planting density can be increased
considerably--from less than 1,000 trees to about 1,450 trees
per hectare in Brazil.  El Salvador has no formal assistance
programs for production expansion, but experiments with 8,500
trees per hectare have yielded about 48 bags of coffee per
hectare within the second and third years after planting;
trees generally do not reach bearing maturity for about 5 to
6 years. However, the average yield in El Salvador for
1976-77 was about 20 bags per hectare from a density of about
1,400 trees.

     Estimated per hectare yields for the countries are:

                 Country              Yield
                                  (60-kilo bags)
               Brazil                  8.2
               Colombia                8.8
               El Salvador            20.0
               Mexico                 12.6
               Ivory Coast             5.0
Export taxes
     Coffee export taxes provide important revenues and for-
eign exchange to most producing countries. The countries
maintain that such taxes are merely a means of allocating
revenues between public and private sectors and have no
effect on price.

     Brazil, Colombia, and Mexico have increased export tax
rates significantly since the July 1975 frost, increasing
government revenues and helping curb inflation by limiting
the amount of price increases that accrue to the private
sector. The tax is one of the main sources of revenue for
El Salvador which has not changed the rate since the tax was
established in 1949.  In the Ivory Coast, where exporters
serve merely as brokers for the Caisse de Stabilization des
prix at fees set by the Caisse, there is a 23 percent export
tax in the form of a customs duty that reverts to the govern-
ment. Remaining revenues after exporter fees and customs
duties go to the Caisse.



                             26
     Producing countries claim that taxes are adjusted in
response to world price movements and do not lead world
prices. However, increasing the tax rate may act as a deter-
rent to export while exporters await lower tax rates, lower
minimum internal prices that must be paid to growers, or
higher price offerings from importers.  Until one or more of
these events provide the exporter with what he considers an
acceptable profit margin, coffee may be withheld from the
market, thereby diminishing supplies and putting upward pres-
sure on prices.

      On the basis of our review, we are not able to say to
what Axy:ent taxes have influenced prices since the Brazilian
fro...   Analysis of price movements in relation to the timing
and amounts of Brazil's tax increases establish no clear pat-
tern of cause and effect relationships. However, the wide
difference between total tax increases and price increases
since the frost suggests that forces other than taxes were
more influential on price movements.

     The table on the following   page shows the ICO indicator
(composite) price for Brazilian   coffees on the dates of an-
nounced tax increases, changes    efore and after the in-
creases, the new tax rates, a     percent of tax to price.




                             27
                                           ICO indicator price
                                                         Increase                                                                    Percent
                                    Before     Before        Most recent                            _  Export tax                    uf tax
Resolution         Effective       date of        tax         day after                                      Amount of                 to
   date              date         Resolution    increase     resolution                            Amount     increase                price

                                  ------------------------- (per pound)------------------------

Before   frost                       $     .69               $    -           $-                   $ .16                 $ -          23.2

  8-04-75           8-05-75              a/.98                    .29               .01                 .17               .01         17.3

  8-22-75           8-23-75                .96               -.
                                                              02                    -                   .18               .01         18.8

  9-22-75           9-23-75                .96                    -                                      .19              .01         19.8

 10-24-75          10-27-75                .96                    -                 _                    .20              .01         20.8

 11-24-75        b/11-25-75                .94                -.
                                                               02                    -                   .21              .01         22.3

 12-16-75          12-17-75               1.01                    .07                -                   .22              .01         21.8

  4-23-76           7-01-76           c/1.54                      .53               .09                  .26              .04         16.9

 lu-06-76          10-07-76               1.60                    .06               .03                  .30              .04         18.8

 11-09-76          11-22-76           d/1.85                      .25               .05                  .38              .08         20.8

 12-20-76          12-21-76               2.13                    .28               .16                  .60              .22         28.2

  1-17-77            1-18-77              2.47                    .34                -                   .7.              .18         31.6

  2-15-77            2-!6-77              2.53                    .06               .05                  .81              .03         32.0

  3-04-77            3-07-77              3.20                    .67               .33                  .91              .10         28.4

  3-08-77            3-09-77              3.53                    .33               .16                  .94              .03         26.6

  4-01-77            4-04-77              3.69                    .16                -                  1.01              .07         27.4

  5-05-77            5-06-77              3.15                   -.34                -                  1.08              .07         32.2

  5-30-77            5-31-77              3.25                   -.
                                                                  10             05
                                                                                -.                      1.13              .n5         14.8

  6-27-77            6-28-77              3.20                   -.
                                                                  05                                    1.18              .05         36.9

a/Price     on date of resolution;    price      on    immediatelv         preceding date was not              available.

b/An erlier      resolution    on 11-11-75 was         not       included because         ta.   increase was less than S.01            er    lb.

c/Price was $1.39 before resolution,             but    reached S1.54         immediately before this              tax    increase
  became effective.

d/Price     was $1.76 on   Nov. 8,   but reached        $1.85         immediately    before     this     tax   increase becoame      effective




                                                                    28
      In several instances there was no immediate change in
prices after taxes were increased. In other instances, tax
increases were followed by immediate price increases.   Prices,
from December 1975 until they egan to drop in mid-April 1977,
usually continued to rise substantially beyond the amount of
the tax increase. For example prices increased by $0.03 a
pound after a tax increase of $0.04 a pound became effective
on October 7, 1976, and continued to increase by another
$0.13 to $1.76 a pound before the next tax increase of $0.08
a pound was announced on November 9, 1976. Beginning with
the tax increase on April 4, however, prices have either
remai.ed unchanged or dropped following tax increases, which
would support contentions that tax increases do not neces-
sarily drive prices upward.

     On the other hand, the timing and amount of tax increases
may affect exports. According to some assessments, Brazil
induced increased exports in mid-1976 by announcing in April
that an export tax increase would not take effect until July 1.
The volume of exports jumped from 900,000 bags in both April
and May to 2.1 million in June, then dropped back to about 1
million bags in July, August, and September. On September 10,
Brazil indicated its intention of keeping the export tax rela-
tively low by announcing less than $0.003 a pound tax increase
to take effect on October 1. Exports for October, November,
and December reached 1.5, 1.7, and 2.8 million bags respec-
tively. When concern developed over declining stocks, Brazil
increased the export tax, effective December 21, by almost 60
percent, from 38 cents to 60 cents a pound and followed this
with a 30-percent increase--from 60 cents to 78 cents a pound
in January 1977. Taxpes were again increased in February and
March. The continuance of these increases together with
increases in minimum export registration prices after the
decline in world prices began in April virtually eliminated
any demand for Brazilian coffee in early July.

Minimum export prices

     Most producing countries establish minimum prices at
which coffee can be exported. The minimum prices re in
various forms designed to serve a variety of poii:y objec-
tives, and have been used to limit exports, thus rZdicing the
supplies of coffee on the world market.

     Brazil
     Brazil maintains a minimum price at which coffee may be
registered for export. Historically, until May 1977, the
registration price was periodically increased to levels below



                             29
both the price for Brazilian coffees and the ICO composite
indicator price for all coffees. From the end of 1976 to the
end of March 1977, the minimum price was increased to such
levels five times.
                      Minimum           ICO            ICO
                    registration   indicator for    composite
   Date                price     Brazilian coffee     price

                    --------------- (per pound)-

Dec.   13,   1976      $..90           $2.09          $2.02
wan.    3,   1977       2.10            2.47           2.28
Jan.   31,   1977       2.20            2.47           2.22
Feb.   28,   1977       2.30            3.10           2.87
Mar.    7,   1977       2.80            3.53           3.04
Mar.   28,   1977       3.30            3.69           3.16

     In May 1977, the price o Brazilian coffee started
decreasing from its high of $3.69. The indicator price was
$3.25 and the composite price had dropped to $2.94 when Brazil
increased the minimum registration price to $3.20 on May 23.
At June 1, 1977, the indicator price dropped to $3.20 and
stabilized at the minimum export price level. As the world
price was down to $2.57, there was no demand for Brazilian
coffee at the enforced price level.
     Brazilian exporters will not put coffee on the interna-
tional market until consumers are willing to pay the higher
price or the government lowers the minimum price.   In the
interim period and  as long as supplies are available, consum-
ing countries will rely on coffees from other countries at a
lower price. On July 5, 1977, the ICO indicator price for
Colombian coffee was $2.70, for other mild cofees was $2.54,
and for robusta was $2.04.   It was reported later in July
that coffee exports  from Brazil had virtually ceased.

     At that time the President of the Brazilian Coffee Insti-
tute was reported to have announced that Brazil would not
sell coffee during the second half of 1977 at less than $3.20
a pound. He stated that Brazil ad shipped almost 8.4 mil-
lion bags in th- first 6 months of 1977 and had only about
3.5 million bags available Lo export in the second half. On
July 13, 1977, the Finance Minister stated in a press release
that Brazil was in no hurry to sell coffee since its 4 trade
balance was in surplus and the level of its interna; onal
reserves was highly satisfactory.




                                  30
      Colombia
     Colombia:s minimum export price is in the form
requirement that eporters must deposit a designated of a
                                                       amount
of foreign exchange with the central bank prior to
coffee.                                             exporting
          In exchange, the exporter receives
and short-term notes for the coffee exports. local currency
                                               This system
allows Colombia to take advantage of the foreign exchange
earnings on the sale of coffee. According tc Colombian
officials, the repatriation requirement (reintegro)
intended to dictate the market price but is meant     is not
                                                   to
Colombian price in line with the world market price. keep the

     There were only two increa es in the reintegro from
early June 1976 through January 1977, but there were frequent
increases from February through April to catch up with quickly
rising prices.


                        Reintegro             ICO indicator
  Date of          Per 70-kilo                 price for
modification          bag       Per          Colombian coffee
1976:
  June 7            $259.25        $1.68          $1.76
  November 27        284.65         1.85
  December 27                                      1.91
                     307.60         2.00           2.25
1977:
  February   10      331.00           2.15
  February                                        2.34
             16      354.00           2.30        2.43
  February   24      376.00           2.45        2.65
  February   28      423.00           2.75
  March 9                                         3.04
                     440.00           2.86        J.09
  March 23           457.00           2.97        5.25
  April 14           477.00           3.10        3.34
     When Colombia increased the requirements from $2.97
$3.10 per pound on April 14, 1977, the price for           to
coffee had reached $3.30 at the dock in New York. Colombian
                                                    However,
prices began to decline in mid-April and reached $2.95
pound in early May. With the reintegro fixed at         per
                                                  $3.10
pound, exporters were in effect required to exchange    per
                                                      more
foreign currency for pesos than they could earn
                                                 on current
sales abroad.

     On May 4, 1977, the President of the Colombian
Exporters Association announced that private coffee Coffee
had suspended coffee sales abroad. He blamed the    exporters
decrease on speculation by foreign roasters       price
                                            and stated that


                              31
suspension of sales would be maintained until prices rose to
levels that would make exports remunerative. He stated that
export taxes, foreign exchange rates, and foreign currency
return requirements prevented exporters from accepting less
than $3.27 per pound.

     Suspension of sales by private exporters gives the
government's coffee agency a free hand in the marketing of
coffee. The agency's purchasing. activities in the interior
were reported to have increased. With such control, the
agency can elect to hold supplies off the market until buyers
are willing to pay the asking price or it can export, there-
fore retaining in the government a greater portion of the
proceeds from sales.

     However, on May 26, 1977, the reintegro was r-duced to
$3.03 a pound, but the ICO indicato. price had fallen to
$2.90.  In June and July 1977, there were three more reduc-
tions in the reintegro.
                      Reintegro         ICO indicator
      Date            per pound        price per pound

     June 17            $2.70               $2.56
     July 12             2.45                2.41
     July 16             2.34                2.40

Although the reintegro was decreased substantially, it was
not until mid-July that it was reduced below the export price.
Other countries

     Other producing-country measures during this tight sup-
ply situation have helped to keep pressures on price. For
example, the El1 Salvador Coffee Company approves exports and,
although there is no formal minimum export price, has the
option to purchase coffee from an exporter whenever the cm-
pany feels the sale price is less than the world price.
     The company purchased about 1 million bags of 1974-75
coffee, 500,000 bags of 1975-76 coffee, and estimates pur-
chases from the current crop at less than 100,000 bags. Such
policy interferes with free market forces and, in effect,
supports cont nuation of high prices by limiting supply.
Other measures

     Many producing countries have set high quality export
standards. This causes consumers to pay a premium for higher


                                32
 quality and automatically reduces supplies
 export.                                    available for

      Other measures require exporters
 amounts for the domestic market, based toon reserve specific
                                              export quantities.
 In E1 Salvador, exporters must deliver to
 Coffee Company one bag of a particular lower the El Salvador
 every four exported. Mexico adopted a similar   grade coffee for
 ning April 1, 1977, requiring exporters           measure begin-
 Mexican Coffee Institute one bag for everyto deliver to the
                                               two to be exported.
      Brazil also adopted a one-for-two-bag
effective July 1, 1977, but the manner of requirement,
compliance may also influence prices upward.insuring exporter
forces the exporter to sell directly to domesticThe new rule
a price considerably below the export price.       industry at
subsidized price and sales taxes these domestic Because of the
expected to be made at losses to the exporters.   sales   -e
exporters must either accept a decline in          Hence,
                                            profits or seek to
recover losses through their export sales.

Brazil's stocks production and purchases
     Understatements of stock levels and possibly
and purchasing from other producing countries      production,
have caused upward pressures on prices.       by  Brazil may

      Whether intended or not, coffee available
was understated by 5.1 million bags from         from Brazil
January 1977. That quantity represents    March  1976  to
Brazil's 1976 exports and, in a period ofabout  33 percent  of
plies, may have helped maintain an upward  already  tight  sup-
                                           pressure on prices.
The International Coffee Organization confirmed
inventory of 24.8 million bags of green coffee a Brazilian
                                                 on hand at
March 31, 1976. On January 26, 1977,
                                       the Bra7ilian Coffee
Institute reported that the March 31, 1976,
                                             inventory should
have been 29.9 million bags. The Institute
stocks held in warehouses of less than       indicated that
                                        10,000
held on farms, and stocks held by the soluble bags, stocks
not been counted by ICO.                       industry had

     This adjustment has implications
developed between the Brazilian Coffee for the difference that
                                        Institute and the U.S.
Department of Agriculture over production
                                           forecasts for the




                             33
1976-77 frost-affected crop. 1/ Though this crop was harvested
during May to September 1976,-both principals have steadfastly
refused to amend their figures. Brazil states that no more
than 6 million bags (60 kilograms each) were harvested, and
Agriculture maintains that 9.5 million bags should have been
harvested.

     It is difficult to determine the accuracy of respective
positions when essentially the same statistics (Brazilian
Coffee Institute data on numbers and types of trees and acre-
age under cultivation) are used by both parties. Differences
have hinged basically on varying perceptions of tree and soil
conditions and anticipated yields based on physical observa-
tions in selected test areas. One principal difference was
over the expected 1976-77 harvest in the State of Minas Gerais.
In April 1976, just before the harvest, the Coffee Institute
estimated production for the State at 4.9 million bags, but
subsequently reduced this estimate to 2.3 million bags.
Agriculture estimated production at 5 million bags.

     The revised stock level for March 31, 1976, and other
data now available on stocks, exports, and domestic consump-
tion tend to confirm the accuracy of Agriculture's 1976-77
forecast. The Coffee Institute reported in February 1977 that
21.2 million bags of coffee were on hand at December 31, 1976.
Using these revised stock figures and the Institute's data on
exports and domestic requirements, the 1976-77 harvest can be
derived as follows:



1/Another difference has shown signs of developing over
  projections for the 1977-78 crop now being harvested.
  In April 1977, Brazil reduced earlier estimates of the
  1977-78 harvest from 14.8 million to 13 million bags.
  Agriculture had been estimating a 15 million to 18
  million bag harvest before settling on a figure of 17
  million bags in a May 11, 1977, press release. However,
  according to information reported June 30, Brazil is
  now estimating 15.3 million bags.  Information indicated
  that most trade source estimates were 13 million to
  15 million bags. Two export companies that specialize
  in surveying Brazil's coffee were estimating closer
  to 17 million bags.




                            34
                                     Millions of 60-kilo bags

Stated inventory 12-31-76                             21.2
   Exports 4-1-76 to 12-31-76             12.9
   Domestic requirements 4-1-76
     to 12-31-76   (3/4 of
     7 million bags)                       5.3        18.2

                                                      39.4
Less revised inventory
  at 3-31-76                                          29.9
        1976-77 production                             9.5
     These figures are tenuous because of the uncertainty over
actual domestic requirements and because quantities held in
the Institute's overseas warehouses which are reportedly in
Beruit, Hamburg, Trieste, and Hong Kong are neither reported
to ICO nor subject to ICO verification.
Brazilfs purchases from
ot er producing countries

     There were several reported Brazilian coffee purchases
or attempts to purchase from other producing countries during
1976. It was stated officially that the coffee was needed
for the domestic soluble industry, but it was rather clear
that such moves were also intended to influence prices.

     Correspondence from the U.S. Embassy in Brasilia, dated
April 20, 1976, states that an official of the Brazilian
Coffee Institute had confirmed Brazil's efforts to purchase
500,000 to 1 million bags of Angolan robusta coffee for
domestic blending into soluble coffee for reexport. Sub-
sequent correspondence on April 27 shows that five major
Santos coffee traders had indicated that Brazil had also
attempted purchases from the Ivory Coast. 1/ The traders
believed these were Brazilian moves to force prices up. They
indicated, however, that such purchases made good economic



l/Correspondence dated April 20, 1976, from the U.S.
  Embassy in London reported that a Brazilian official
  had confirmed negotiations with both Angola and the
  Ivory Coast and, although quantities had not been
  decided, the latest estimates were about 333,000 bags.


                                35
and commercial sense because importing lower quality coffee
for the soluble industry would free larger amounts of higher
quality Brazilian coffee for export at higher values.

     In April 1976 a trade publication, while not mentioning
the Ivory Coast negotiations, called the confirmation of the
Angolan purchase one of the most significant and price-
supportive developments of the month. The negotiations,
which Brazilian traders believed involved 500,000 bags, were
apparently announced about mid-April.

     When U.S. concerns over Brazilian purchases were conveyed
to the Brazilian Coffee Institute on April 26, 1976, an
Institute official attributed price increases at that time
to rumors floated by traders with long positions who wished
to drive up prices. The official was also skeptical that a
purchase could be consummated because Angola had only about
30,000 bags of coffee and the Institute was interested in pur-
chasing 250,000 to 300,000 bags.

     Another Institute official refused to confirm in May
1976 a rumored purchase of 50,000 bags of coffee from a French
trader. Trade sources were reported to believe a purchase
had been made.

     Coffee prices began to drop after achieving highs in
June 1976.  In late July, the confirmation of Brazil's pur-
chase of some 560,000 bags from El Salvador coincided with
a halt in the price decline, and, according to a trade publi-
cation, the market for all types of coffee took on added
strength.

     Again, when U.S. officials questioned Brazil's motives,
the officially stated purpose was to supply the domestic
soluble industry. However, Brazil was notably upset over
declining prices when there had been no change in the supply
situation, and there were ackn.owledgments that producers had
to protect themselves. An E1l Salvador official saw the June
decline in price as an attack by U.S. roasters selling short
far beyond registered available stocks. According to this
official the El Salvador Coffee Company tried to sell in
July but could find no buyers and the market situation con-
vinced E1l Salvador to sell to Brazil.

     In August 1976 purchases of 334,000 bags from the
Ivory Coast and 168,000 bags from the Malagasy Republic were
reported. There were also indications in August of impending
purchases from Cameroon and Mexico. In January 1977 there
was a reported purchase from Malagasy. In June 1977 purchases
involving 300,000 bags from El Salvador and 167,000 bags from


                             36
Malagasy were reported. Purchase negotiations with
Coast were also reported in June. Brazil's Finance the Ivory
                                                    Minister
was quoted as saying that Brazil intends to buy coffee
seas to regularize prices, not to increase them.       over-

     The actual quantity of coffee imported into Brazil
not clear. Ivory Coast officials told us a purchase      is
                                                     was
never made and apparently the Angola purchase did
rialize. About 160,000 bags from El Salvador's    not mate-
                                                stocks  in
Hamburg and about 57,500 bags from El Salvador were
to be shipped quickly to satisfy Brazil's immediate supposed
                                                    needs.
The balance was to be delivered from El Salvador during
6-month period following October 1, 1976.                the

     According to an agency of Banco Do Brazil in
1977, Brazil's green coffee imports from January January
                                                  through
November 1976 all came from El Salvador--57,380 bags.
December 1976 a trade publication reported that 30,000 In
                                                        bags
of robustas from the Malagasy purchase had been
                                                 offloaded
Rio de Janeiro early in December and a shipment of         in
                                                    46,000
bags was scheduled to arrive at that port by the
month.                                            end of the




                            37
                               CHAPTER 4

               COFFEE MARKETING IN THE UNITED STATES

     The usual flow of coffee into and through the domestic
marketing chain is generally first to the importer or mer-
chant who sells to roasters. Roasters in turn sell to whole-
salers, after which the coffee enters the retail market for
sale to consumers. A wholesaler may also import and roast
coffee, and in some instances of total domestic vertical
integration, can operate retail outlets.
IMPORTS

     Although small amounts of coffee are produced in Hawaii
and Puerto Rico (about 165,000 bags) the United States
depends primarily on imports for its total coffee needs.   In
1976 U.S. imports were about 37 percent of total world  imports.
Coffee enters the United States in the form of green beans,
roasted coffee, and soluble coffee. In 1976 total imports
consisted of 96-percent green coffee, 1.5-percent roasted
coffee, and 2.5-percent soluble coffee.
                           Imports of coffee
                 …---…--------60 kilo bags (note a)--------------
          Green       Roasted Soluble                     Customs
Year      coffee      coffee       coffee     Total        value

1974 19,242,556 189,668 1,637,149 21,069,373 $1,637,929,822
1975 20,288,508 324,751 1,107,216 21,720,475 $1,671,430,125
1976 19,787,842 372,552 1,550,243 21,710,637 $2,857,442,202
a/In green bean equivalent.
In 1976 the U.S. exported 219,166 bags (green bean euivalent)
of coffee in green bean, roasted, and soluble forms.
     Eight producing countries supplied 64 percent of U.S.
green imports in 1976.




                                   38
 Country                                   -Year
                             1974          1975       -    1976
                           ----------- 60 kilo bags-------------
Brazil                    2,724,885       3,747,164
Colombia                                                   3,090,943
                          3,089,160       3,399,782        2,687,223
Mexico                    1,323,637       1,661,636
Ivory Coast                                                1,868,346
                            748,497         965,366        1,329,456
Indonesia                   941,348         764,746
E1 Salvador                                                1,081,819
                          1,110,820       1,018,254        1,044,676
Guatemala                 1,096,124
Angola                                      874,256          748,573
                          2,395,508       1,201,850          870,550
     Total               13,429,979      13,633,054       12,721,586
     Green coffee is sold in the cash
ment markets) and the futures market. market  (spot and ship-
                                       Principal
entry for coffee in the United States are New     ports of
                                               York, New Orleans,
and San Francisco.

Cash market
     The spot market entails trading among importers,
jobbers, and roasters of coffee that has arrived         brokers,
ing countries and is already landed and in          from produc-
                                             warehouses. The
shipment market involves the purchase or sale
fee for shipment from a producing country at of actual cof-
New York importers in the shipment market      a given time.
                                            generally buy cof-
fee from the producing country in one
c.&f. (cost and freight), c.i.f. (cost,of insurance,
                                           three ways, either
or on an f.o.b. (free on board) delivery              freight),
                                           steamer at loading
port. Payment is usually made by a letter
                                             of credit drawn
upon the importer's bank entitling the exporter
30, 60, or 90 days' sight against the shipping to draw drafts
                                                 documents.
      Purchases of green coffee are handled by a
                                                  variety of
buyers. Coffee is bought directly from the
tries by importing agents and to a lesser    producing  coun-
sors. The importing agents handle about 75 degree  by proces-
coffee shipments into the United States whilepercent of all
purchased directly by processors. In many      the balance is
                                            cases,
processors that buy directly from the producer      the same
additional supplies from importing              will  also buy
States there are approximately 100 agents.   Tn the United
                                    green coffee importers or
agents and 200 processing companies; however,
                                               40 percent of
total imports are handled by 4 importing companies.




                             39
      The agents in turn sell the green beans (1) directly
the processors, which include food manufacturers and chain to
grocers that have their own roasting and packaging facilities,
and to roasters that are solely in the business of roasting
coffee and (2) to merchants that resell to processors. The
basic business function of the importing agents is their role
as middlemen. They merchandise the coffee in its original
import package by buying, importing, financing, and then
reselling green coffee beans. They usually havy established
connections in the producing areas, worldwide communication
networks, market analysis and financing capabilities, and
experience in traffic and shipping.
     When processors purchase directly from the source, they
are responsible for all importing, shipping, and financing
arrangements. Several U.S. importers function as exporters
in producing countries.
Futures market

     The New York Coffee and Sugai Exchange, Inc., in New York
City and the Coffee Terminal Market in London are the major
coffee futures markets. These futures markets are used exten-
sively by the international coffee trade, principally as a
management tool for day-to-day operations.

      The Exchange provides a central marketplace for trading
 in futures contracts. A contract is a legally binding agree-
ment to buy and sell a specified quantity and quality of cof-
fee for delivery in a specified month in the future. The
price at which a contract is traded is determined by open
bidding and offering and reflects the market's assessment of
what the price will be at a future point in time. The market
is, therefore, a barometer of price and is not intended to
be a mechanism for delivering or receiving the actual offer.
Although the contract contemplates delivery, the parties
usually relieve themselves of their obligation by entering
into offsetting transactions. In 1976 actual delivery was
made on less than 1 percent of the contracts traded.

     The Exchange is used basically (1) to avoid the risk of
price fluctuation (hedging) and (2) to assume the risk of
price fluctuation (speculating). The hedger expects to need
to buy or sell coffee at some future date and, rather than
risk less favorable prices in the future, either buys or
sells coffee contracts for future delivery. The speculator
takes the risk that the hedger seeks to avoid with the goal
of making a profit on predicting the direction in which the




                            40
 market will move.  The futures market also
 cally viable means for preharvest financing offers an conomi-
                                              to producers as
 well as marketing boards of exporting countries.
       There is one actively traded contract on the
                                                      Exchange--
 the "C" contract.   Until June 1, 1977, this contract included
 deliverable growths from Mexico,, El Salvador,
                                                 Guatemala, Costa
 Rica, Nicaragua, Honduras, and Colombia.   On June 1, 1977, the
 New York Coffee and Sugar Exchange expanded
                                              the "C"
 to cover deliveries from 18 rather than 7 countries contract
 with the July and September 1978 contracts.            starting
                                                The amended "C"
 contract added coffees from Kenya, Tanzania,
                                                Uganda, New
 Guinea, Peru, Venezuela, Dominican Republic,
 India, and Rwanda. The primary purpose of the  Burundi,  Ecuador,
                                                  expansions was
 to increase the volume of futures trading by
                                                increasing the
 options of available coffees.

Regulation of the futures market

      The Commodity Futures Trading Commission was
the Commodity Futures Trading Commission Act        created by
                                              of 1974
(7 U.S.C. 4(a)) to regulate commodity futures
                                               markets. The
Commission maintains a daily market surveillance
                                                   program which
collects, summarizes, and analyzes transactions
                                                 to identify
and prevent market congestion or manipulation.
                                                 It obtains
trading data from each of its members in order
                                                to identify
individuals and firms that have the potential
                                               to disrupt the
market.
     Several actions have been taken to prevent manipulations
of the futures market.  For example, in August 1976 the Com-
mission was concerned about the supplies of
                                            coffee available
to satisfy delivery on September contracts and
at which those contracts were being liquidated. the slow rate
                                                  To prevent
these situations from adversely affecting
                                          price the Commission
raised margins--the amount a trader must deposit
                                                  for each
contract--three times to speed up liquidations
                                                and limited
trading to liquidation only.

      In cases of erratic market behavior, the Commission
poenas the documents of the traders in quest-ion           sub-
whether the intent of such trading behavior      to determine
                                             was to manipulate
the market.   Recently, it subpoenaed two U.S. brokers for
formation on the trading activities of two of their         in-
clients.                                            foreign

PROCESSING
     At the processing stage of the coffee marketing
                                                      system
roasters prepare coffee into ground and instant
                                                coffees.   The

                              41
two largest U.S. coffee processors purchase between 60 and
85 percent of their green beans from domestic coffee merchants
and the remainder directly from producing country sources.

     The U.S. coffee processing industry is made up largely
of regional roasters and packers including retail grocery
companies and national food manufacturers.  Processors may be
independent roasters which prepare their own brands and prod-
ucts for chain grocers, small food manufacturers, and small
specialty shops, or they may be national or regional food
manufacturers which prepare their companies' brands of coffee.

     In the wholesale market, processors sell to the retail
grocery trade. Wholesale prices are generally set by the
largest processors, and changes in wholesale quotations by
one or more industry leaders are usually followed by wide-
spread competitive moves in the trade.  However, although the
wholesale quotations of major roasters may be static for long
periods, promotional discounts and special promotional tie-in
sales result in real wholesale prices to the grocery trade
which can vary from month to month.

DISTRIBUTION

     The distribution network from the processors to the con-
sumer market consists of supermarket chains and other grocers,
retailers, institutions, and other wholesalers.

     An average rJ.S. supermarket sells approximately 25 dif-
ferent brands of coffee at a wide range of retail prices.
National brands compete directly with a variety of regional
coffee products as well as a store's own brands.

     The following table shows coffee market shares held in
1974 and 1975 by specific companies for both regular and
instant coffees.




                             42
                  Coffee Market Share by Company

                             Regular coffee         Instant coffee
                            194        1975        1974     -T975
                            -------- (percent of market) -------
 General Foods Corp.:
     Maxwell House          25.3       24.9
     Maxim                                       25.5         24.9
                              -          -        7.0          5.5
     Sanka                   4.0        4.0
     Yuban                                       11.2         11.6
                             2.2        2.2       2.0          2.0
     Freeze-Dried Sanka          -          -      3.6         3.2
     Max-Pax & Brim          3.7        4.1        3.5         3.5
       Total                35.2       35.2      52.8        50.7
Procter & Gamble Co.:
    Folger's               20.7        21.0        6.8        8.0
Hills Brothers:
    Hills Bros.             7.7         7.6        1.0         .9
Standard Brands:
    Chase & Sanborn         4.3         4.2        2.0        1.9
Nestle:
    Nescafe
    Taster's Choice 100%                        11.0         11.0
      Coffee                 -
    Decaf                                       11.7         11.7
                                        -          1.4        1.4
    Taster's Choice
      Decaffeinate                      -        5.1          5.4
    Total                    -          -       29.2         29.5
Borden:
    Kava                     -          -          .8          .7
All other                  32.1       32.0       7.4       8.3
     Coffee is also sold in specialty shops,
it directly from importers or roasters        which purchase
                                       in the
beans or special-order blends and roastings. form of green

   Another distribution channel for coffee
sector, including hotels, restaurants,     is the institutional
                                       and public and private




                             43
facilities. Although major roasters are factors in the insti-
tutional market, a significant proportion of that trade is
accounted for by regional and local coffee firms.

Pricing and promotion

   The last link in the marketing chain is the consumer.  A
firm's objective, be it a processor, wholesaler, or retailer,
is to maintain and improve its market position, and market-
ing strategy, therefore, is based on assumptions of probable
consumer response.  What happened to coffee prices in the
post-1975 frost period was in large part due to the cost of
the green coffee.  However, the marketing system's promotion
and pricing policies, geared to maintain each firm's ultimate
market position with the consumer, also affected domestic
prices.

   Coffee is a highly competitive grocery item.   Marketing
experts view coffee as an item that the consumer buys nearly
every week and is apt to remember the price paid for it the
week before.  Both processors and retailers reportedly operate
at low margins on coffee in order to compete.   As competition
varies from market to market across the country, so do prices.
Accordingly, coffee wholesalers frequently feature promotional
offerings which also vary quite a bit from market to market.
They offer retailers various display, advertising, and coupon
allowances.  Such allowances reduce the cost of the product
to the retailers and the profit margin to the manufacturer
and make that product more price competitive. As a high turn-
over item, bargains on coffee can also be a decisive factor
in a consumer's decision to shop in a given grocery store.
Consequently, to compete, retailers move coffee prices up
grudgingly.

   Due to competitive and promotional reasons, some proces-
sors we interviewed stated that they sold their coffees at
a loss during the postfrost period.  Independent roasters
that market their own brands could nct absorb the loss, as
did the national food chains which market multiple lines of
products, and consequently suffered substantial setbacks dur-
ing that til'e. By not being able to discount their coffee
below cost, they were forced to maintain retail prices above
cost and thus lost customers to their competitors' cheaper
brands of coffee.

FACTORS THAT AFFECTED CONSUMER PRICES

     Until 1966 world coffee production was greater than
demand and stocks had increased to over 87 million bags.      Sub-
sequently, continued growth   in demand resulted   in an excess


                              44
of consumption over production which continued for most of a
decade as production scarcely advanced. Shortfalls were
provided by existing stocks and at the time of the July 1975
frost, world stocks had decreased to 39 million bags when
demand was about 76 million bags and production was about 74
million bags.
     In 1975 inventories of green coffee in the United Stetes
had fallen to 2.5 million a9s from a normal level of 4 to 5
million. As the news of the frost reached the coffee trade,
importers and roasters became concerned over possible short
supplies and increased prices. Imports in the third uarter
of 1975 increased by 33 percent over the second quarter and
74 percent over the same quarter of 1974. As consumer demand
did not react adversely to the resulting price increases,
imports remained at a high level through the first quarter
of 1977. During this period production continued to be out-
paced by demand and supplies of available coffee were being
depleted. Exporters could demand their prices because buyers
were willing and continued to pay.

     Most observers were surprised that the consumer demand
for coffee did not decrease in view of the continuously in-
creasing prices. Even though the price elasticity of demand
for coffee has been historically very low, the general con-
census was that after a certain price level, the elasticity
would increase, resulting in decreased demand.  In hearings
before the Subcommittee on Domestic Marketing and Consumer
Relations and Nutrition of the House Committee on Agriculture
in March 1976, a research firm predicted that the price of
green coffee would rise from the then $1.00 a pound to $2.30
a pound in the following 12 months. A representative of the
Department of State replied that, barring some new event,
there was no particular reason why the price should go any
higher than $1.00. By mid-March 1977 the ICO composite indi-
cator price had reached $3.00 and was still climbing.

     To many increasing prices were not understandable in
view of reports that U.S. per capita consumption had been
gradually decreasing over the same period.  Per capita con-
sumption figures are deceiving in representing consumption
trends. Even though individual consumption in the major con-
suming countries has decreased, populations have grown and
total consumption has increased. Furthermore, noncoffee-
drinking cultures, such as Japan, have joined the ranks of
coffee consumers, adding further to total world consumption.

     In the spring of 1977 when retail prices reached $3.00
a pound with prospects of going much higher because of the



                             45
 increasing prices
 and consumer demandof began
                        green bean imports, the situation
                             to decrease.                 altered

      Roastings for the first
cent from the same quarter of quarter  of 1977 fell by 16 per-
                               the year before. Warehouse
movement at) showed a drop of 3 percent
January to Ei hruary and February to       and 5 percent from
First quarter imports, however, had   March, respectively.
over the previous quarter and ending  increased  by 23 percent
quarter increased by 10 percent over   inventories  for that
previous year and by 26 percent        the first  quarter of the
As consumer demand and roastings over  the previous quarter.
                                  continued to decrease into
the summer of 1977, the demand for
creased, with a significant decreasegreen coffee imports de-
                                       in price of imports.
      From February of 1976 until nid-1977,
lower than wholesale prices. At their       retail prices were
of green coffee imports and retail      highest level, prices
                                   prices had risen by $2.70
a pound while wholesale prices had
                                   increased by $2.80 over
prefrost prices. Added to the greatly
green coffee, there were major increasesincreased price for
the coffee industry. Prior to the         in the financing of
                                   frost, payment for green
coffee was due 30 days after the receipt
quently, 20 days of credit were consideredof coffee. Subse-
erally the term was 10 days.                good, but gen-

     Above the price and financing of the
                                          beans, the processor
incurred increased inventory and processing
with their increased costs, the processors costs. To deal
period from the previous average of         cut the inventory
                                    60 days to 45 days.
     The greater cash involved, the shorter
                                            term of payment,
and the reduced percentage of mark-up
                                      made it difficult for
many small roasters to stay in business.




                            46
                            CHAPTER 5

                   COFFEE   INFORMATION SYSTEMS


     Green coffee prices in the postfrost period
                                                  were extremely
sensitive to any news which could affect
                                          coffee supplies and
prices, such as government policies of producing
weather conditions, and political situations.     countries,
                                                Decisions on
purchases, sales, and prices are generally
                                            based on antici-
pated supply and demand.  The way these factors are perceived
by the decisionmaking structure in both
                                         the private sector
and government is determined by the type
                                          and quality of the
data flowing into the marketing system.

     The world supply of green coffee consists
                                                of total pro-
duction for a given year plus the carryover
                                             stocks at the
beginning Qf the year.  The ending stocks result after domes-
tic consumption and exports are removed
                                         from the available
supply.  Coffee industry data consists of information
                                                       from
government, the private sector, the ICO,
                                          trade associations,
and the international coffee business community.

THE U.S. GOVERNMENT'S ROLE IN
COFFEE DATA AND INFORMATION

     The U.S. Government disseminates information
                                                   on almost
all stages of coffee marketing from poduction
Reports are available on conditions and         to consumption.
                                         events affecting the
coffee industry as well as statistics on
                                          quantities and prices.
     The Departments of Agriculture and Commerce
primary responsibility for gathering and reportinghave the
                                                    information
on colfee.
Production information
     U.S. Gove-nment information on coffee production
                                                        is pro-
vided by the Depaltment of Agr~culture.
                                          The administration
of the forecasting and informazion system
                                           for coffee is divided
between the Assistant Secretary for International
                                                   Affairs and
Commodity Programs with responsibility
                                        for the FouLign Agri-
cultural Service (FAS), and the Director
                                          of Agricultural
Economics, Policy Analysis and Budget
                                       with responsibility for
the Economice Research Service (ERS).

     FAS maintains a worldwide corps of agricultural
                                                     attaches.
The primary mission of the attaches is
                                       to promote U.S. commod-     -
ities in foreign markets.  There are agricultural attaches in
75 percent of the coffee-producing countries.  Representation


                              47
 can be in the form of either one or more persons
                                                   in the
 coffee-producing country or in a neighboring country
 responsibility in the coffee-producing country.       with
 sentatives report information on a regular basis These   repre-
 eign Commodity Analysis unit of FAS.             to  the  For-
                                       In compiling reports
 the attaches rely on data published by host-government
 cies, on periodic checks with traders, warehousemen,     agen-
 business groups and on personal inspection.           and  other

      In addition to the information compiled incountry
 attaches, FAS receives information from the State       by the
                                                    Department's
 Economic/Commercial officers in the coffee-producing
 This information comes in the form of cables and      countries.
                                                   such reports
 as the Quarterly Economic Review.

     The methodology oi the data gathering and the
of the reporting usually is based on the importance frequency
                                                     of the
country in coffee production and trade and the importance
coffee as a source of foreign exchange. In Brazil,          of
che regards coffee reporting as a very important     the atta-
                                                 part of his
total activity, and it is probable that more field
is done on coffee than any other commodity.         survey work

      In El Salvador the attache perceived the monitoring
the coffee industry as his major concern because            of
of coffee is El Salvador's most important source   the sale
                                                   of revenue.
     On the other hand, the attache assigned to Liberia
responsible for reporting on five African countries,      was
ing the Ivory Coast 1/, on 12 commodities, including   includ-
According to the attache, his primary role was         coffee.
"salesman" for U.S. agricultural products, with to  be a
                                                 secondary
responsibility for providing intelligence on foreign
that compete with U.S. agricultural commodities.       products
which the U.S. imports, such as coffee,             Products
                                         fall into a third
priority category.
     The attache visited the Ivory Coast only to fulfill
official reporting responsibility. Consequently,           his
                                                   he has made
no field trips into the coffee growing areas, relying
information almost entirely on 2 of the over 30        for
the Ivory Coast. Four of the five exporters thatexporters   in
                                                   export
half of the Ivorian coffee and the export representative   about
one American coffee firm in Abidjan had never been         of
                                                    contacted.


l/Subsequent to our review, an attache was assigned
  Ivory Coast.                                      to the



                             48
        Although FAS collects data
  official foreign government       from many sources, including
                                statistics,
  independent judgment in arriving           it believes that
  different from those presented     at estimates, even though
  the general public and industry by other sources, best serves
  estimates that production         interests.   For example, FAS
                             in Brazil for the 1976-77
  crop was 9.5 million bags,                             coffee
  tute estimates it at 6.0    while the Brazilian Coffee
                            million bags.                  Insti-
                                            Both parties stead-
  fastly support their own
                            estimates.
       In Colombia and El Salvador
                                     the attaches did not con-
  sider data issued by the
                            government
 Colombia the attache claimed           to be reliable.    In
                                that his estimates were higher
 than the Federation's because
                                 he included losses from
 band trade in the total production                         contra-
                                       figure and the Federation
 did not.   In E1l Salvador, Embassy officials
 statistics were held by                        stated that the
                           only a few individuals within
 Salvador Coffee Company.                                   the E1l
 ment the data with other    As a result, they have
                            information gathered fromto supple-
 exporters, other host government                       producers,
                                    agencies, and the ICO.
      Analysis and forecasting
      The Foreign Commodity Analysis
 sible for analyzing and forecasting unit of FAS is respon-
 consumption, and trade trends.          world coffee production,
 received from the attaches         I   compiles production data
                             and other sources.     Information
from other sources is used
                             when no attache data is available
and to adjust attache data
                             when the analyst believes
adjustment is appropriate.                                such
                               The data received is compiled an
quarterly and lists by country
tion and exportable production the figures on total produc-
ing coffee year and the specificfor the current and forthcom-
The completed compilation            source of the iformation.
                            is
Service for review and comment. sent  to the Economic Research

      ERS's Foreign Demand and
                                Competition Division is
 sible for agricultural production                       respon-
focuses on worldwide supply         and trade forecasts.   It
                              and demand conditions and
piles information by country                             com-
for each commodity are totaledand commodity.   Country forecasts
These regional commodity         regionally and worldwide.
compilation submitted by totals are then compared with the
                          FAS; 48 hours after receipt
compilation, ERS meets with                            of the
                             FAS to discuss the data
on the final figures.                                 and agree

      In compiling coffee production
ERS obtains data from many           and trade information,
                            sources, including the same
as FAS, such as attaches.                               sources
                            Although ERS compares the
                                                      attache


                              49
  information to the other sources, such
                                         as ICO, it believes
  the attache data is generally acceptable.

      Analysis of Department of
 showed that from the 1970-71 to Agriculture
                                  the 1975-76
                                              crop estimates
 culture's first production estimates          crop years, Agri-
                                       have
 postharvest estimates by about 4.3 million  deviated from its
                                              bags (6.5 percent)
 over actual to 3.8 million (5.3 percent)
 cipally because of weather occurrences. under actual, prin-

      Publication
       After it arrives at acceptable figures,
 a statement on world production of coffee      FAS will prepare
                                             and a news item for
 the "Weekly Roundup of World Production
                                          and Trade." Produc-
 tion data is published also in the "Foreign
 Circular" on a quarterly basis. The           Agricultural
 the public and is circulated through  publication  is free to
                                       a mailing
 January 1977 there were 1,188 subscribers        list.   As of
 copies. The last distribution survey        receiving  1,409
                                        was
 showed that 69 percent of the recipients made in 1971, and
 communit-                                  were in the business

     Other FAS publications, such as the weekly
culture" and the FAS "M" series, include         "Foreign Agri-
from time to time. The "M" series are     information on coffee
that FAS publishes as it perceives the  special issue reports
                                        need, and has included
reports on "Coffee Production in Africa,"
and "U.S. Coffee Consumption, 1946-76."    "Coffee Situation,"

     FAS is responsible for the organization,
publication of data in forms that provide      analysis, and
guidance to policy-level executives and    information and
                                        others,
of its evaluations depends on the accuracy       and the value
relies upon. FAS claims that the evaluationsof the data it
base, although not always exact, have          and the data
                                      been relatively good
and on the trend line.

      ERS also publishes information on coffee
 trade, and forecasting. The "World Agricultural production,
published in June, September, and December,         Situation"
duction and trade and lists statistical       summarizes  pro-
                                         information by region
and country. Regional "Agricultural Situation
reports are published every year during           and Outlook"
Western Europe, the Western Hemisphere,  March  to  May, for
                                         the
Oceania, Africa and West Asia, the People's   Far  East and
                                              Republic of China,
and Eastern Europe. The coffee production
used in the ERS situation reports are        data and statements
                                       subject to review and
clearance by FAS prior to publication.



                             50
      Current technology
      The LANDSAT program of the National
 Space Administration (NASA) has potential Aeronautics and
 on coffee production.                      for gathering data
                         LANDSAT's twin satellites systemati-
 cally pass over and send back imagery of
                                           virtually every
 point on the globe once every 9 days.
      NASA obtained images of the frost-struck
 4 days before and 14 days after the freeze.    area of Brazil
                                               The results of
 the LANDSAT analysis were compared to Brazilian
 tute ground survey statistics, and the relative Coffee Insti-
 ference between the two results was about        error or dif-
                                            2 percent.
     The analysts' report concluded that the procedure
yield highly accurate estimates of the severity         can
damage to coffee, is potentially considerably   of  frost
far less costly than conventional ground      faster, and is
While the results were positive, the     survey techniques.
                                     report stated
tests are needed to establish adequate confidence that more
repeatability.                                     in their

      The Executive Director    ICO expressed
a seminar by the end of 1977 to discuss and a desire to hold
                                              examine the poten-
tial value of various aeri-l surveys, including
stated that total reliance on LANDSAT imagery      LANDSAT.  He
producing regions would be unwise as terrain    for  all coffee-
terns vary. Whec coffee is grown in open       and planting pat-
                                           areas with no cover
the detectors can pic' up infrared light
aloae. However, coffee trees are often    waves from coffee
                                         interspersed   with other
trees which may shade the cuffee trees,
                                         and  LANDSAT  detectors
would pick up projections from growths other
this case, analysis of LANDSAT imagery would than coffee. In
bined with ground checks.                      have to be com-

     The Office of Public Affairs at Goddard Space
Center recently received a communication            Flight
regarding analyzing growth and production from a Geneva firm
                                           of coffee, tea, and
cocoa on plantations through the use of LANDSAT
                                                 imagery.
Consumption, exports and stocks
of producing countries
     The major source of information available
Government on domestic consumption, exports,   to the U.S.
                                             and
producing countries are the countries themselves. stocks of

     Information on domestic consumption is
tionable. Most countries do not collect suchthe most ques-
                                              data, and when


                             51
it can be obtained, its validity is debatable as most data-
gathering processes are usually incomplete. Generally, this
data is obtained by the countries from their coffee industries
and from some surveys, and U.S. agricultural attaches have no
means of verifying the information.  Historically there has
been an average, 2-million bag worldwide error.

     Export figures are probably the best statistics in all
countries.  They are obtained through customs procedures,
which are usually rigorous, especially where export taxes are
a source of government revenue as they are or most coffee-
exporting countries.l/ The FAS compares export figures with
import statistics from other countries.

     FAS receives figures on stocks from the attaches and
from Embassy commercial/economic officers. Stock figures
are compiled from official host government publications and
are supplemented by interviews with the trade. To check the
validity of yearend stock figures obtained, FAS computes a
figure from the basic equation using beginning stocks, pro-
duction, domestic consumption, and exports. The quality of
the derived figure on ending inventory depends on the validity
of the figures in the other elements of the equation.

     For example, a November 1975 attache report from the
Ivory Coast showed that coffee stocks were around 1,667 thou-
sand bags at the end of the 1974-75 season. However, in
November 1976, the new attache reported stocks at only 250,000
bags at the end of the 1974-75 season. By the end of the fol-
lowing year, stocks were reportedly down to 83,000 bags. This
also conflicts with official ICO verification results, which
claimed that the Ivory Coast had stocks of about 1,567,000
bags at the beginning of the 1975-76 season and about
1,133,000 bags at the start of the 1976-77 season. As the
stock figure was derived, it is assumed that the changes re-
sulted from changes in other elements of the eauation.

U.S. domestic marketing system

     The Business Division of Commerce's Bureau of the Census
is responsible for information on the domestic supply of green
and processed coffee.  It aggregates, evaluates, and publishes
data on imports, inventories, and roastings. This data is
reported on a regular and quarterly basis in the "Current




1/A problem exists when coffee is leaving the country
  as contraband.


                             52
Business Reports--Green Coffee, Inventories, Imports, Roast-
ings." The major source of price information is Labor's
Bureau of Labor Statistics, whose Food Branch in the Office
of Prices and Living Conditions collects, aggregates, and
publishes the price statistics on foods, including coffee.

     Imports
     Official U.S. import and export statistics are collected
by T:easury's Bureau of Customs, and furnished to the Bureau
of the Census for compilation. The import data is obtained
from the import entry and warehouse withdrawal forms which
importers are required by law to file with Customs officials,
who verify country of origin, net quantity, value, and com-
modity classification. Effective with the January 1974 sta-
tistics, Bureau of Census foreign trade reports present
import data in terms of f.a.s. (free alongside ship) and
c.i.f. (cost, insurance, and freight) values in addition to
the Customs value data previously shown.

     Import information is reported as "General Imports" and
"Imports for Consumption."

     --General imports are a combination of entries for
       immediate consumption and entries into Customs bonded
       warehouses. They generally rflect total arrivals of
       merchandise, whether it enters consumption channels
       immediately or is entered into warehouses under
       Customs' custody to be subsequently withdrawn for con-
       sumption or export.
     -- Imports for consumption are a combination of entries
        for immediate consumption and withdrawals from ware-
        houses for consumption. They generally reflect the
        total of commodities entered into U.S. consumption
        channels.
     Official U.S. export statistics are compiled by the
Bureau of the Census primarily from shipper's export declara-
tions which are required to be filed with Customs officials.
Summary statistics for both imports and exports are published
in Report FT 900 "Summary of U.S. Export and Import Merchan-
dise Trade," and Report FT 990, "Highlights of U.S. Export
and Import Trade." Information on additional sources of for-
eign trade is furnished in the "Guide to Foreign Trade Sta-
tistics".




                             53
      Inventories and roastings

     The Business Division of the Bureau of Census collects
quarterly data from the coffee industry on green coffee
inventories and roastings.  The quarterly survey involves 160
firms, including roasters and nonroasters, and uses a shuttle
form that is remailed to each company over a 3-year period.
The resulting information for the preceding quarter is pub-
lished 40 to 45 days later, and there is a regular practice
of following up with companies that do not respond. The Divi-
sion has a response rate of 85 percent from industry.   It is
currently evaluating the return to a monthly survey and re-
porting service as was done 10 years ago. The National Cof-
fee Association was to make its recommendation on the matter
but the result of their survey of members was mixed.  There
is some doubt whether the companies in the survey would be as
compliant in responding to the survey if it were required 12
times a year instead of 4. Also, there is some doubt about
the level of accuracy of reportings made that frequently.

     After the Division receives the data, it is analyzed and
checked against figures from past surveys and, in case of a
question, the Census taff will call the companies. To fur-
ther check on the data's reliability, the Business Division
checks with people in the trade who have their own estimates
and matches it against import and export figures received
from Customs. Census generally finds a 2-percent difference
between the Customs figure and reported inventories and roast-
ings, which is accounted for as loss by theft, coffee used
for experimentation, and speculation that bags could be short-
shipped as Customs does not weigh bags at entry. The Divi-
sion claims that the quarterly estimates on supply are off at
times, but that the average result for the year is generally
right on target.

     The survey has encountered several problems. One major
problem has been the inconsistency with which the companies
in the survey account for inventories.  Due to different sys-
tems, some companies have included in the inventory figures
supplies that were in transit from the producing country and
not yet recorded in Customs' import figures.  As a result,
the "Current Business Reports" issue of August 1976 shows
inventories at March 31 of 3,064,000 bags and at June 30 of
3,670,000 bags.  In a November 1976 issue, however, these fig-
ures were revised to show inventories at March 31, 1976, of
3,194,000 bags and at June 30, 1976, of 2,908,000 bags.

     Subsequently, buyers were able to confirm that certain
expected shipments were included in the inventory figures and
were also able to specify the amount of coffee that was in


                             54
transit and in inventory. To prevent this from recurring,
the Division included a special notice on the form specifying
what items were to be included in the inventory figures.

     Wholesale, retail, and consumption
      U.S. Government agencies that monitor the coffee market-
ing system do not obtain data on the quantities of coffee sold
into the wholesale or retail markets or purchased by the con-
sumer. The Bureau of Labor Statistics does obtain informa-
Licn on wholesale and retail prices. Information on roasted
coffee wholesale prices is collected by a survey of instant
and roasted coffee distributors. It is taken on a monthly
basis and the prices reported are those listed for the middle
of each month. The survey sample includes six companies.

     The major source of the Bureau's information on green
coffee wholesale prices is the "New York Journal of Commerce"
listing. The prices used are those listed in the Tuesday
issue of the week of the 13th of every month for our types
of coffee--Brazilian Santos #4, Colombian Manizaie,;, African
Ambriz, and Mexican Washed. The average prices     r these
above four types are published in the monthly "Who'esFle
Prices and Price Indexes." In the case of large dil eruri:es
between the listed prices and indexes between onths, the
Bureau includes explanatory notes in the publication.

     Information for the consumer price (retail) index is
gathered by the Bureau of Labor Statistics through a regular
monthly survey in 56 cities--the same cities used for commod-
ities surveyed for the Consumer Price Index. The coffee sam-
ple in the survey consists of instant coffees in 6-olice
sizes and roasted in 1-pound sizes and it includes the "vol-
ume selling brands" in three chain stores and three indepen-
dent stores per city. Store brands are also included if they
happen to be the volume selling brands. The consumer prices
are listed by the current and previous month's prices.

     The use of these price listings has a few limitations.
Slight inconsistencies between surveys for wholesale and re-
tail prices are caused by timing and sample makeups, and list
prices do not take into consideration volume or promotion
discounts.

     The sample used for the retail price survey includes the
"volume selling brand" of national brands and grocery store
brands. The sample for the wholesale price survey includes
only national brands. This could give a somewhat distorted
picture of the 'differences between the wholesale and retail



                             55
prices of coffee since the store brands are generally lower
in price.

     Furthermore, the Bureau's retail price survey is made
on the first Tuesday, Wednesday, and Thursday of each month
while the wholesale price survey takes place in the middle
of the month.  As a result, it is difficult in a period of
fluctuating prices to trace the exact differential between
the two at any given point in time.

Comprehensive market information

     Information on all stages of coffee production and
marketing is aggregated and analyzed by the ERS Commodity
Economics Division.

     The Division compiles supply and utilization tables for
consumption as well as remarks on the coffee situation and
supplies it to the Agriculture publication "National Food
Situation," the "Foreign Agriculture Circular," and such spe-
cial publications as the "Food Consumption, Prices, Expendi-
tures," which was a supplement for 1975 to the Agricultural
Economic Report No. 138.  For import and export data the
Division relies primarily on the Census Bureau's "Current
Business Reports," the monthly and annual "U.S. General Im-
ports" and "U.S. General Exports," and the weekly and monthly
computer runs of imports and exports of coffee.  These are
checked against information published by private sources.
Inventory and roasting figures come from the Census ureau's
"Green Coffee Inventories, Imports, Roastings," published in
"Current Business Reports" and from private sources.

     The Commodity Economics Division workload on coffee is
handled by one staff member and a statistical assistant for
whom coffee is only one area of responsibility.  Time and
resource constraints limit the derivation  f statistics on
coffee consumption and future projections to a very simple
mechanical approach.

     Supply and use
     The Division's major work on coffee is a table showing
trends in U.S. coffee supply and use.  This table shows the
total supply of green coffee in the United States and utili-
zation of that supply for exports, military use, and civilian
consumption.

     Consumption levels compiled by the Division are not
based on actual sales but on "Net Civilian Disappearance,"
which is based primarily on roasting data. Equating


                             56
  consumption to roastings may
  because of time lags in the   not represent actual consumption
                               marketing chain and the lack
  data on roasted coffee still                               of
  consumers.                    in inventory and that sold
                                                            to
       The Division bases calculations
                                        of per capita consump-
  tion of all commodities on total
  the sake of consistency, the      civilian population. For
                               same method is applied to coffee.
       This does nc eflect actual
                                     per capita consumption
 since the younc--   ge group in the population
 drink coffee.! 1/ As the share                  normally does not
 changes relative to the total of the coffee drinking age group
 based on the total population population, consumption trends
 those based on the particular will be quite different from
                                age group segment that does
 sume coffee.                                                con-
      The Commodities Economics
 coffee prices and price spreads Division's monthly tables on
                                  allow track .g of coffee
 prices from the green bean to
                                the retail stages.
      Price forecasting
      The Commodities Economics Division
price projections for commodities.         is responsible for
Division nor any other area           However,  neither this
                              in Agriculture have done any
forecasting for coffee, although                             price
been assigned to develop a model one staff member in ERS has
                                   for forecasting coffee prices.
      It is generally conceded that
or models for analyzing a current    price produ%,-on models
and demand have a low level         price in relation to supply
                             of reliability.
INFORMATION SOURCES
IN TIE PRVATE SECTOR
     Marketing decisionmaking
tion on consumption trends thanrequires more accurate informa-
                                 government sources make avail-
able. Changes in inventory
                            levels of processed coffee are
important in determining levels                              very
to gear future purchases, sales, of demand and supply by which
coffee businesses turn to the     and promotions. As a result,
                              private sector for more  exact
information on movement of coffee
                                   from one phase to another.


l/Estimates of consumption
                           by age group, region of country,
  at home and away from home, have
  industry from the annual winter been available to the
  rently published by the ICO.     consumption surveys cur-


                             57
Market research fl

     Primary sources of information are such agencies as
Selling Areas Marketing, Inc. (SAMI), which is owned by Time
Incorporated and reports warehouse withdrawals to food stores
in defined marketing areas.

     SAMI collects information from food operators that
regulaily provide order book listing of all items stocked
in their warehouses.  Each item has its own code number and
product description, so the sequence of reports shows the
movement of goods from each warehouse.  These reports are
compiled on a 4-week basis.

     SAMI agrees that warehouse movements of goods ere not
the equivalent of actual sales, but considers the movement
from the warehouse to the grocery shelf adequate in repre-
senting sales and, therefore, consi,'tion.

     SAMI is also involved in the national experiment with
front-end scanners by large chain grocers, which can maintain
cash register records of goods leaving the store.  The prices
listed are accompanied by the product code.  This type of
record allows a specific tracking of product movement from
retail to the consumer.

     SAMI's work in the movement of food goods does not cover
institutions such as restaurants  hospitals, and schools.
This is the next area that i will be developing, since it
believes that its coverage of the market should be as com-
plete as possible.

Coffee   intelligence report

     The most comprehensive and most widely used source of
coffee information is the George Gordon Paton & Co.,  nc.,
daily "ComElete Coffee Coverage" and monthly "Coffee
Intelligence," whose coverage includes activities in that
day's market, spot, futures, roasted wholesale and retail
prices, production and stocks, exports and imports to and
from producers and buyers, roastings and inventories, con-
sumption and various developments affecting the coffee trade
around the world.  As a rule Paton prints only information,
no- market analyses.

     Paton's reliability is widely acknowledged; ICO members
unanimously accept Paton as the formulator of the indicator
price.  The arrangement calls for a daily submission of the
indicator price to the ICO in London before Paton releases
it to telephone inquiries and to its own publications.


                               58
     Patons'utility varies according to its user. Brokers
trading in te future or spot markets find the information
not timely enough. They use it to have trend data on hand
but do not refer to it in their minute to minute buying and
selling transactions. Large importers and processors rely
on Paton for the supply/demand picture on which they base
long-range planning decisions.

News services

     The major source of spot and futures price information
is the Journal of Commerce. The daily publication prints
prices of coffee in various markets--spot prices in New York
and futures pri.ces on both the New York and London markets.

     The New York spot prices are prices quoted by importers
and jobbers, ex-dock New York in lots of 100 bags or more.
Journal of Commerce reporters receive their information on
spot prices from daily contacts with large coffee dealers
and brokers whom they have found to be reliable. The futures
prices are received from the London Exchange and the New York
Coffee & Sugar Exchange via the ticker service.

     Other information sources include the wire services,
such as Reuters and the Commodity News Service.

     All coffee business groups reported a great reliance on
Reuters. The Reuters service in the United States operates
out of Chicago and covers all commodities. The London wire
service covers commodities on an individual basis.

     Reuters gathers its basic coffee information through
reporters' coverage around the world, press releases, and
publications from producing and importing countries. This
includes immediate receipt of news releases from the Depart-
ment of Agriculture, Bureau of Labor Statistics, and Bureau
of the Census.
     The Commodity News Service operates in much the same
way, except on a smaller scale. It has 19 divisions of com-
modities and corresponding news wires in the United States.
For international dissemination, it has UNICOM news--a wire
service that is linked with United Press International.
UNICOM sources will also provide information for the domestic
services.

Industry communication

     All the parties we contacted in the private sector con-
sidered their daily personal communication with other members


                             59
of the coffee industry as the most important source of infor-
mation. Roasters receive information on crop and market out-
looks for various coffees from their importers. They are
also informed on at least a weekly basis by their retailers
of the retail inventory outlook for their particular products.

     Brokers are on the phone with clients as well as im-
porters, other brokers, processors, and company representa-
tive, around the world, while simultaneously following the
news received from various wire services.

     The National Coffee Association (NCA) is the leading
coffee trade organization in the United States. Its member-
ship of over 200 companies, representing approximately 85
percent of the coffee business community, has regular access
to its weekly newsletters, special bulletins, and surveys.
In carrying out its information, trade promotion, and busi-
ness relations functions with private industry and the United
States and other governments, it provides the trade with a
forum for industry communication.




                             0
                           CHAPTER 6

               RESPONSES TO QUESTIONS PRESENTED

     The Chairman of the Subcommittee on Domestic Marketing,
Consumer Relations and Nutrition of the House Committee
                                                        on
Agriculture requested that we review interagency mechanisms
within the executive branch for monitoring the coffee commod-
ity situation, the International Coffee Agreement, and sup-
pliers' marketing policies and procedures, and respond to
certain specific or implied questions.  Below are responses
to the questions, based on information in the preceding
chapters.

     1.   Is the information collected by the Federal Govern-
          ment sufficient to analyze current supply and demand?

     Although there are gaps and weaknesses, data and informa-
tion collected and compiled by the Federal Government are, in
the aggregate, sufficient to analyze current supply and
                                                        demand.
     The supply of coffee consists of exportable production
and current stocks.  For data on exportable production, the
Government must rely to a great extent on production, domes-
tic consumption, and stock information furnished by producing
countries and the International Coffee Organization.  The
Department of Agriculture does establish its own independent
estimates for production.  In a number of cases, Agricultute's
estimates vary from those presented by other sources.

      Demand is determined by the purchase of coffee at vari-
ous points in the domestic marketing chain.   Fairly good data
is available for exports from producing countries  and imports
into the United States and for roastings.   No quantity data
is obtained on coffee after roasting; therefore, Government
information for consumer demand is based primarily on roast-
ing data. Because of the time period between roasting
                                                        and
retail sales, changes in consumer demand will not be
                                                      reflected
until several months after the occurrence.

     Available information is not sufficient, however, to
reliably forecast future supply and demand and the resulting
price of coffee. Future supply can be affected by unforeseen
natural or political events, including production and
                                                      market-
ing practices of supplying countries.  These events trigger
changes in demand based on future anticipations of supply
availability.  As coffee prices are determined through the
anticipation of future supply and demand, there appears
                                                        to
be no feasible method for forecasting prices or determining
the reasonableness of current prices.


                             61
      2.   What are the interagency mechanisms for monitoring
           the coffee commodity situation and to formulate
           and coordinate U.S. policy with regard to coffee
           and coffee exporting countries?

      The Department of State has primary responsibility for
formulating U.S. policy regarding coffee and coffee exporting
countries.   It represented the United States in the negotia-
tion of the 1976 International Coftee Agreement, with the
assistance of the Departments of the Treasury, Commerce, and
Agriculture as members of the negotiating team. Administra-
tive and technical matters of the agreement are handled by
State's representative to the International Coffee Organiza-
tion.   In matters of policy, State consults with the Treasury,
Commerce, and Agriculture.

     At the time of the negotiation of the 1976 Agreement,
there existed within the Executive Office of the President
the Economic Policy Board with a special commodity policy
group, cochaired by State and Treasury. One subgroup consid-
ered matters concerning coffee.  In May 1977 the Economic
Policy Group replaced the Board.  The Group has a Commodities
Task Force chaired by State. Although the subject of coffee
has been brought before the task force, no subgroup has been
established to deal with it.

      Responsibility for monitoring the coffee commodity
situation through the collection of data and information on
coffee production and marketing is held primarily by the
Departments of Agriculture and Commerce.    Comprehensive
information on all stages of coffee production and marketing
is aggregated and analyzed by Agriculture's Economic Research
Service.

     3.    What are the merits and weaknesses of the Interna-
           tional Coffee Agreement?

      The primary reason for U.S. participation in the Inter-
 national Coffee Agreements has been to assist in stabilizing
 the price of coffee and the revenues of the producing coun-
tries to avoid disruptive effects on development efforts.
Althougn the 1976 Agreement has several changes from previous
agreements that are beneficial to consumers, stabilization
 is at the low end of the price range.  The agreement does not
provide for a price ceiling or buffer stocks as a protection
against high prices.   As the price of coffee has been sub-
stantially above the minimum prices specified in the agree-
ment to trigger export quotas, the agreement as been
inoperative with regard o the 14-percent increase in price
after its inception in October 1976.


                              62
      4.   What are the ramifications of the policies and
           procedures of the producing countries and the
                                                          U.S.
           domestic marketing system on domestic coffee prices?

     Although coffee prices to the consumer since July
have reacted primarily to an anticipated supply         1975
                                                 shortage, the
policies and procedures of exportir- countries
                                                and the U.S.
domestic marketing system do influence the availability
supply and the retail price.                             of

      Coffee producing countries maintain controls over
production and marketing.                               coffee
                            Their policies may be directed
toward controlling production, inventories, and
                                                 exports;
allocating and maximizing revenues; and curbing
                                                 inflation.
To effect these policies, the producing countries
                                                   may
adjustments to production incentives or disincentives, make
                                                        minimum
prices to producers, export taxes, and minimum
                                                export prices.
In implementing policies and procedures, the producing
tries have been directed by their perception of         coun-
                                                 their own best
interests.

     The governmental actions influence supply and
                                                    create
pressures on price.  The use of export taxes and minimum
prices to producers in support of minimum export
                                                  prices has
occasionally limited the availability of a country's
                                                      coffee
supply to the world market.  Such practices as limiting the
quality of coffee for export, requiring sales
                                              to the domestic
market at subsidized prices, and purchasing from
                                                  other pro-
ducing countries also affect supplies available
                                                 to consuming
countries.

     The marketing systems of importing countries
                                                   may also
affect demand nd the price paid by consumers.
demand has been inelastic to price within certainHistorically,
                                                   limits.
However, without knowledge of the limits, wholesalers
retailers were reluctant to pass the full cost         and
                                               impact on to
consumers during the recent period of increasing
                                                  prices.




                             63
 APPENDIX I                                                                                                                APPENDIX I


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          InG     LE                         to        you   ofKJanuary          4th,.IArequested.that           th     Ge               nayl




          General Accounting Office
      Washington,                       D.        C.



      In my letter to you of January 4th, I requested that the General
      Accounting Office look into the information collection effort of
      the Federal Government as it pertains to coffee and seek to
      determine in a comprehensive fashion whether this information is
      sufficient to analyze current supply and demand.

      As Chairman of the Subcommittee on Domestic Marketing, Consumer
      Relations and Nutrition of the Committee on Agriculture, I request
      that as an integral part of your effort you review other aspects
      of international and domestic coffee marketing:

                      1.           Interagency mechanisms within the Executive Branch
                                   of government to monitor the coffee commodity sit-
                                   uation and to formulate and coordinate U.S. policy
                                   with regard to coffee and coffee-exporting
                                   countries.
                      2.           Review the present international coffee agreement
                                   and, to the extent possible, analyze its merits
                                   and weaknesses.
                      3.        Review the marketing policies and procedures of
                                the 18 largest suppliers of coffee to the United
                                States, the interrelationship of U.S. processors
                                and the marketing system, and the ramifications of
                                their policies and procedures on domestic coffee
                                prices.
      I recognize that this request is broad in nature and will require
      some time to complete. Also, because of the widespread interest




                                                                                64
APPENDIX I
                                                          APPENDIX I


Honorable Elmer B. Staats
Page 2
 ~.anuary 25, 1977


of many Members of Congress, I would suggest that the
be addressed to the Congress as a whole. During the report should
the review, I would appreciate periodic briefings     conduct of
                                                  by your staff
as the circumstances warrant. In addition, I would
written confirmation that the study, as outlined in like a
                                                    my two
letters, will begin as soon as possible.

                     (Your   BtnceLJ
                              .



                        Fred Richmond
                        Chairman
                        Subcommittee on Domestic Marketing,
                        Consumer Relations and Nutrition
FR:dam




                                65
APPENDIX II                                      APPENDIX II



                           BRAZIL


     Brazil has experienced rapid economic expansion in the
last 10 years.  From 1968 through 1974 the gross domestic
product grew at an average annual rate of 10 percent with
per capita growth at 7 percent.  By 1974 average per capita
gross domestic product was $760 and the growth in GDP has
continued, increasing in 1976 by 8.8 percent or $138 billion.
Growth in the industrial sector was 11 percent and in the
agricultural sector 4.2 percent, with total farm output
accounting for 15 percent of total gross domestic product.

     In 1976 there was a 16-percent increase in exports and
total export earnings in 1977 ae estimated at $12 billion
to $13 billion. About 15.6 percent of Brazil's exportable
production goes to the United States.  Agricultural exports
reached a record high of $6.1 billion in 1976 and may reach
$8 billion in 1977. Major export commodities include coffee,
soybeans, cocoa, sugar, corn, tobacco, and beef.

     The benefits of the increased exports have been largely
offset by an inflation rate of about 46 percent in 1976, due
mainly to the increased price of petroleum.

      Brazil is the world's largest coffee producer and sup-
plies about one-third of total coffee exports. However,
before the 1975 frost, the economic imoortance of coffee to
Brazil had been declining both domestically and internation-
ally.   In the late 1950s half of Brazil's foreign exchange
was received from coffee, but until the frost, the percentage
had been decreasing as other crops became more important.
However, since the frost and the resulting increase in price,
coffee is again Brazil's leading foreign exchange earner as
well as its largest export.   In 1976 coffee exports had d
value of $2.3 billion, and 1977 earnings are estimated at $3
billion to $4 billion.

COFFEE PRODUCTION AND MARKETING SYSTEM

     The Brazilian Coffee Institute (IBC), an autonomous
agency within the Ministry of Trade and Industry, is involved
in al' aspects of coffee marketing and production.  It is
responsible for implementing coffee policies set by the  Na-
tional Monetary Council and provides financial assistance to
all elements vithin the coffee marketing system as well as
other services to producers.  The IBC participates also in
the marketing system, buying and selling coffee for domestic
and international purposes.



                             66
  APPENDIX II
                                                   APPENDIX II



 Coffee production
      As of 1976 IBC estimated that there
 coffee producers in Brazil with about    were about 300,000
                                       2.4 million hectares
 in production. Less than 100 producers
 than 10,000 trees or about 10 hectares. have farms of more
      Producers receiving assistance from
                                           IBC must comply with
 certain IBC requirements for (1) planting
 variety of coffee trees, (2) planting      a new high yielding
 manner, and (3) using fertilizer in   trees  in a specific
                                     a prescribed manner.
      In 1975 the average yield per hectare
 dried green beans. Total yield for          was 8.2 bags of
                                     all
 substantially during the last 5 years,   producers has varied
                                         attributable
 planting techniques and weather conditions.          to new

      Assistance to producers
     The Bank of Brazil advances
producers through an agricultural low-interest-rate loans to
                                   credit program sponsored
by the IBC.  IBC guarantees the loans which are
improving production yields and purchasing       provided for
pesticides.                                 fertilizer and

     The program involves extending credit
amounting to 80 percent of the minimum       to producers
example, if the minimum support price support price. For
per bag, IBC would guarantee financing was 1200 cruzeiros 1/
cruzeiros. The loans are obtained        of up to 1,000
percent, as compared to commercial  at interest  rates of 8
                                    rates of 36 to 50 percent,
and are repayable within 60 to 90
                                   days.
     Cost of production
     A producer's cost includes labor,
                                       fertilizer, pesticides,
financing for new planting and machinery,
duction and farmland. Labor represents     and taxes on pro-
the costs, and fertilizers and chemicals about 50 percent of
highest costs.                            represent the next

     According to IBC, the cost of producing
coffee has risen substantially over          a 60-kilo bag of
in 1975-76 to $52.91 in 1976-77 and recent years from $39.02
                                    to $82.16 in 1977-78.


1/ At July 26, 1977, 13.36 cruzeiros
                                     equalled $1.00.


                                67
APPENDIX II                                         APPENDIX II




Cooperatives and millers

     There are about 72 producer cooperatives throughout
Brazil's coffee growing region which receive members' coffee
at warehouses, where it is stored at members expense. The
cooperatives have responsibility to clean, grade, store, bag,
and sell coffee for their members. They also provide advice
and information on market conditions and trends, assistance
on obtaining IBC financing, and pesticides and fertilizers
at wholesale prices.
     The cooperatives' exporting capacity is estimated at 2.5
million bags and they sell members' coffee to brokers and
exporters or export directly.
     There are 350 millers in Brazil who perform services
similar to the cooperatives: cleaning, sorting, grading,
storing, and selling coffee. They purchase coffee from pro-
ducers or may sell their services to producers. Millers
sell coffee to domestic roasters, the soluble industry, and
exporters. They may also deliver coffee to brokers who will
arrange sales on a commission basis.
     The use of millers is declining as more producers are
taking advantage of the services offered by cooperatives.
From 1970 to 1975 the number of cooperatives increased by 12
percent, attributable to IBC encouraging producers to use
cooperatives as a means of reducing costs.
IBC participation in marketing
     IBC buys coffee during periods of surplus crops and low
world market prices,   it last purchased coffee in 1974.   IBC
maintains a domestic warehousing network with capacity of
58 million bags of coffee, and has warehouses in Hong Kong,
Trieste, Hamburg, and Beirut.
     Coffee purchased by IBC is sold both for domestic use
and export. Generally, IBC coffee is sold to domestic
roasters and to the soluble coffee industry at subsidized
prices and recently has been sold at about 50 percent of the
current export prices.
     As an incentive to    importers, BC initially offers cof-
fee at reduced prices.     For every two bags at the regular
market price, IBC would    provide from its overseas stock one
bag at a price slightly    lower than the current market price.



                                68
APPENDIX II                                      APPENDIX II




Commercial exporters

     There are about 85 exporters which represent a 72-percent
decrease since 1970.  Exporters sell coffee to foreign markets
throughout the world.

     Exporters purchase 70 to 90 percent of their coffee from
brokers and the remainder from producers, millers, and coop-
eratives and store it from 30 to 90 days in their own storage
facilities or in public or private warehouses.

Financial assistance
available to exporters

     The Bank of Brazil provides low-cost credit for ware-
housing and cash advances for export sales.  Loans for
warehousing are extended against the coffee in storage at
interest rates 10- to 12-percent below regular commercial
rates.  Cash advances for export sales are extended on con-
firmation of the sale even though coffee has not been shipped.

     Exporters' costs

     Exporters' operational costs have increased substantially
since 1975, chiefly because of the increase in the internal
price of a bag of coffee, which has risen 900 percent since
April 1975 to $300.  Transportation, warehousing, blending,
and bag cost add up to about $2 per 60-kilo bag.

     Coffee destined for export is assessed a tax by IBC.
The export tax or contribution quota provides revenues for
the Coffee Fund Account at the Central Bank.  These revenues
are used only for programs and activities which benefit the
coffee industry.  The tax increased from $21 a bag before
the frost to $134 in April 1977.  Therefore, in April 1977
the cost to export a 60-kilo bag of coffee was $436 ($300
paid to producer plus $2 transportation, processing, and
bag cost plus $134 export tax).  The per pound cost to the
exporter was about $3.29 at the time coffee was selling at
$3.69 ex-dock New York.

     In addition, Brazil has a minimum price at which ex-
porters can register sales, and at April 1977 the minimum
registration price was $3.20 a bag.




                             69
 APPENDIX III
                                                   APPENDIX III



                            COLOMBIA


      Colombia's predominantly agricultural economy
 of Latin America's strongest in terms of             is one
                                           growth, with a
 per capita gross domestic product of $586
                                            in 1970.   Its
 real gross domestic product increased by
                                           about 7 percent
 in 1976, up from about 5 percent in 1975.
                                             The growth of
 the agricultural sector has averaged about
                                             5 percent annu-
 ally from 1970 through 1976.  Colombia's main export com-
 modities are coffee, sugar, cotton, and rice.

     Colombia has cultivated and exported coffee
                                                   since the
early 19th century, but only during the early
                                               part   f this
century has coffee become economically important.
                                                     Today
Colombia ranks as the second largest coffee
                                             producer in the
world and coffee production and marketing
                                           is its major eco-
nomic activity.   Coffee constitutes over 25 percent of total
agriculture production and nearly 10 percent
                                              of the gross
domestic product.   In 1976, 7.7 million bags valued at almost
$1 billion were exported, representing 53
                                           percent of total
export earnings.   In recent years coffee has accounted for
9 percent of total government revenues and
                                            the industry is
the main source of employment for about 10
                                            percent of the
population, about 2 million people.

     Colombian coffees are considered by many to
                                                 be the
richest and mildest grown.  The best known Colombians are
medellins.

COFFEE PRODUCTION AND MARKETING SYSTEM

      The Colombian National Federation of Coffee
                                                   Growers is
 a private, nonprofit guild association founded
                                                 to promote
and protect the cultivation of coffee in Colombia
                                                    and to
develop markets abroad.   Its board of directors consists of
ministers of government agencies and representatives
                                                       from
the coffee industry.   The Federation, while a spokesman for
coffee interests, is an agent of government
involved in all aspects of coffee production policy.   It is
                                              and marketing
and (1) assists coffee growers through public
                                                works, tech-
nical assistance, and cooperative purchasing,
                                                (2) stabilizes
internal coffee prices by guaranteeing a minimum
                                                   price for
growers and managing coffee stocks through
                                            the National Cof-
fee Fund, (3) promotes the consumption of
                                           coffee, and (4)
administers the system of export and retention
                                                 taxes and the
required currency repatriation on exports.




                              70
APPENDIX III                                          APPENDIX III




     Part of the revenues from the retention tax are used
by the Federation for future development projects and activ-
ities and the remainder are held in the Central Bank for
investments in current social development activities in the
coffee growing areas.  The Federation provides funds to build
roads, bridges, and schools; to operate rural health posts;
and to carry out projects to extend rural electrification and
potable water.

     By the end of 1977, it is expected that the amount in
the Central Bank being held for future development will be
$800 million.

Coffee production

     The area available for coffee production in Colombia
totals tbout 4.8 million hectares with about 1.1 million
under production by about 302,000 producers.  Farms range in
size from 1 to over 100 hectares, and about 61 percent con-
sist of 3 to 11 nectares.

     Current yields are about 9 bags a hectare, but modified
planting techniques with new varieties of trees are expected
to improve yield considerably.

      The 1969, 1970, and 1972 freezes in Brazil indicated to
the Federation that the pattern of world coffee production
was going to change and that Brazil's share of the world mar-
ket   as going to decrease, so it adopted a policy to increase
its share by increasing production to 10 million bags by the
1978-79 crop year.   To do so, the Federation emphasized in-
creased productivity; currently, some producers are getting
about 50 bags per   ectare.  To bring about in-reased produc-
tivity, the Federation is making available to producers from
1977 through 1979 about 2.5 billion pesos 1/ in low-interest-
rate loans.   The loans provide for giowing and processing
(drying, dehulling, classifying) coffee, new plantings of a
higher yielding variety of trees, and purchasing fertilizer
and pesticides.   The producers are given credit at interest
rates of about 12 to 18 percent compared with commercial
rates of about 27 to 30 percent.




1/In April   1977,   36.5 pesos were equal   to one dollar.



                                 71
APPENDIX III                                     APPENDIX III




Marketing

     The Federation buys coffee directly from cooperatives
and intermediaries.   For the 1974-75 crop year it purchased
about 70 percent of the total coffee produced, most of it
from cooperatives.  Coffee purchased by the Federation
directly is sold to domestic roasters, buyers in Europe and
Japan, and exporters.   The Federation does not usually sell
directly to the United States.

     The Federation guarantees growers a minimum price for
coffee.  In April 1977 the support price was $136 per 70
kilos.  The internal price is left to fluctuate in response
to supply and demand as long as it remains above the minimum
price.  When prices drop below that l1vel, the Federation
buys all coffee offered at the minimum price  .d stores it
for sale in times of higher prices.  At the time of the 1975
frost, Federation stocks were about 3.2 million  ags.  Stock
levels in early 1977 were estimated at about I million bags
and were to be reduced to about 800,000 bags, which is the
minimum level that must be maintained to keep the export pipe-
line open.

     Cooperatives

     There are 44 producer cooperatives in Colombia which buy
most of the coffee production.   The coffee is usually pur-
chased within 8 days after the harvest and moved to ware-
houses.  Cooperatives buy coffee only from member producers
for their acco~unt or for the account of the Federation under
the support price program.   The producer pays transportation
costs to te storage facilities which, for a typical large
cooperative, has a storage capacity of a million kilos.

     Generally, a cooperative sells to the Federation except
when prices paid by exporters are higher than the support
price, and i    ells directly to exporters.  A coorative
receives a commission of 9 pesos per 11.5 kilos when buying
coffee for thte Federation, and the Federation pays the coop-
eratives' operating costs.   When selling to an exporter, coop-
eratives  eceive 2 percent of the selling price.

     Intermediaries

      In Colombia there are about 23 intermediaries--irivate
operators who buy, grade according     cuality, and sell cof-
fee.   Intermediaries provide growers !.L.  ertain services,
such as loanis for foo  and supplies and cther personal assis-
tance.


                             72
  APPENDIX III
                                                   APPENDIX III




      An intermediary purchases coffee
                                       from all producers,
 including those who belong to
                               cooperatives.  Most purchases
 are from producers who have
                             traditionally sold their coffee
 to the intermediary and the
                             producer pays transportation
 costs to the intermediary's warehouse
                                       where the coffee is
 stored until sold.

      Sales are normally made to exporters;
 periods of low prices, oversupply,         however during
 buying, sales are made to the      or when exporters are not
                               Federation.  The intermediary
 pays the transportation costs
                               to the purchaser's storage
 facilities.

      Exporters

      The approximately 43 exporters
 their coffee from intermediaries,    in Colombia buy most of
                                    although some is purchased
 from large producer cooperatives.
 classifies the coffee according     The exporter mills and
                                  to quality and stores it
 usually for no more than a month.
                                     Exporters sell green cf-
 fee primarily in the U.S. and
                               European markets.
      Before the exporter can ship
                                    a 70-kilo bag of coffee,
it must pay export and retention
                                   taxes, which in April 1977
amounted to about 66 percent
                              of the export price, and repa-
  *iate foreign crrency   reintegro) to the government,
waich it receives pesos and                                for
                             notes
the reintegro was $477 per 70-kilo in exchange.    In Ap.il 1977
                                     bag.  This is in effect a
minimum export price.   The export tax is based on 17
of the reintegro.                                       percent
                    The retention tax is paid ptly
and partly in cash.                                    in coffee

      To export a 70-kilo bag o   coffee and pay the coffee
portion of the retention tax,
                                the importer must purchase 130
kilos of unclassified c ffee,
                                which when processed yields
kilos of export coffee and 6.5                               100
                                 kilos of lower grade coffee,
resulting in a 23.5-kilo loss.
                                  The lower grade cuffee and
30 kilos of the export coffee
                                are remitted to fulfill ti
coffee portion of the retention
                                  tax, leaving '0 kilos for ex-
port.   The level of taxes; and the percentage
in  ash change frequently in response          .nat may be paid
                                        to market and monetarv
conditions.

     On the basis of information furnished
                                            by the Federation,
the cost g:o export a 70-kilo
                               ag of coffee in April 1977 was
$460 ($136 paid to producer plus
                                  $4 milling, transportation,
packaging, and port costs, plus
                                 $81 in export and $239 in
retention taxes).   The price received by the exporter
$485, providing an apparent                            was
                             profit of $25 a bag.


                             73
APPENDIX III                                    APPENDIX III




      Producers receive about 28 percent of the export price.
This is a major incentive for illegal exporting, and an esti-
mated one million bags of coffee, representing about 13 per-
cent of total production, left Colombia as contraband during
1976.




                             74
APPENDIX IV                                            APPENDIX IV




                             EL SALVADOR


     The economy of El Salvador      is primarily agricultural.
Major products are coffee, cotton, sugar, corn, sorghum,
and meat.    Agriculture   uses about 67 percent of the   lano
and furnishes employment for about 47 percent of the popu-
lation. The gross domestic product, increasing by about 5
percent annually since 1970, was $2 billion in 1976, and
c uld increase by 7 percent in 1977.

     El Salvador is the fifth largest coffee producer in the
world, and coffee represents 41 percent of is total value
of exports. El Salvador consistently had a trade deficit
until 1976 when it had a surplus of $66 million due mainly
to the increase in world coffee prices. Betwe 'n 1975 and
1976, coffee revenues increased from $169 million to $400
million, and for 1977 they are projected at $740 million.
In 1976 revenues from export taxes on coffee represented 23
percent of all revenue received by the government.

     For the 1976-77 marketing year coffee production is
estimated at 3 million bags, an increase of about 1 million
bags over the poor 1974-75 crop.  In 1976 El Salvador ex-
ported 2,203,000 bags of coffee.

COFFEE PRODUCTION AND MARKETING SYSTEM

     The government's National Coffee Department establishes
coffee marketing policy, rules, and regulations.  The rules
and regulations promulgated by the Department are implemented
by the E Salvador Coffee Company, which was established
after World War II as a private institution to serve the cof-
fee industry.   he majority of any profits are put into a
fund used to stabilize coffee prices. All sgments of the
coffee industry are represented on the Company's Board of
Directors.

Production

     In El Salvador coffee is groa;n on almost all of the land
which is suitable for coffee poduction. Most of the coffee
is grown at altitudes between 500 meters and 1,000 meters,
where the terrain is mountainous and is not suited for other
agricultural crops. Approximately 40,800 coffee growers have
over 147,000 hectares of land under cultivation. More than
67 percent of production is obtained from 1,564 farms averag-
ing 63 hectares. The remaining 39,215 farms average less than
1 hectare of land.



                                75
APPENDIX IV                                       APPENDIX IV




     El Salvador coffee growers are described as being very
efficient.  The average number of trees per hectare is about
1,400 with some plantations exceeding 8,500 trees per hectare.
This high density is achieved with a locally developed dwarf
tree variety known as pacas.  The trees are grown without
shade and about 850 pounds of fertilizer per hectare is
applied each season.  These experiments have yielded about
48 bags per hectare but the national production average in
1976-77 was 20 bags per hectare.

     There is no formal program to encourage increased coffee
production.  We were told that most land suitable for growing
coffee is currently in production, and the remainder, esti-
mated at about 5,000 hectares, is being planted "right to the
last square inch."

 Coffee   Producers Association

     The El Salvador Coffee Producers Association exclusively
represents the interest of about 3,000 growers large and
small.  It rigorously watches the coffee industry to make sure
that producer interests are taken into account in such areas
as pricing and availability of adequate financing.  The Asso-
ciation is represented on the Boards of Directors of the Na-
tional Coffee Company and the National Mortgage Bank.

     Coffee rust

     The greatest concern of producers is the disease known
as coffee rust (roya).   The fungus, which attacks the leaves,
is now n Nicaragua.    Producers are organizing to fight this
potential threat and have begun to stockpile fungicides, con-
struct water storage facilities with credit assistance pro-
vided by the Central Bank, and train personnel in combating
the fungus.  should the rust appear in El Salvador, spraying
would be mandatory.  The cost of the control program is esti-
mated at $284 per hectare.   Even at this cost, it is consid-
ered more economical to fight the rust than to replace the
existing trees with rust rsistant trees.    The president of
the produc  s association estimated ttat coffee production
would drop oy about 30 to 35 percent i   the rust spreads to
El Salvador, despite efforts to control the problem.

     Assistance to producers

      Private exporters and the El Salvador Coffee Company
provide financing to the growers.   Short-term loans are
granted and generally repaid when the coffee is picked and
sold.   The exporters also arrange transportation from the


                                  76
APPENDIX IV                                        APPENDIX IV




farm to the processing plant and supply the  ecessary bags.
As a result many growers sell to the same exporters each year.

Processors and exporters

     The growers have several options available when selling
their coffee.  They can sell to private processors, private
exporters, the El Salvador Coffee Company, or they can pro-
cess and export their own coffee.

     Processors own and operate 133 plants capable of pro-
cessing coffee only to the parchment state.   Once this ini-
tial stage is complete, coffee can be stored usually not more
than one year, according to one exporter.   Exporters own and
operate 85 plants capable of processing coffee to the parch-
ment and green bean state.

     Exporters, including the E  Salvador Coffee Company, are
able to export from 5,000 to 500,000 70-kilo bags in one sea-
son.  Although 70-kilo bags are shipped; fo, reporting pur-
poses, weights are converted to standard 60--kilo bags.

     The exporters sell to their traditional customers first.
Since t e 1974-75 coffee year, most of the export coffee has
gone to European markets, but the United States still imports
about 35 percent of it.

     The El Salvador Coffee Company buys, processes, stores,
and exports coffee.  It also operates one roasting plant to
supply the domestic market.  Coffee growing regions are
served by a network of collection stations where growers can
bring their coffee for transportation to the main processing
plants.

     The Coffee Company competes openly with private ex-
porters to acquire coffee cherry or parchment from a seller
and publishes daily quotes in the local newspapers.  The
prices offered are usually based on the world price.   Private
exporters occasionally complain that the price is too high as
the quotes do not always follow the "downturns" of the world
price.  However, the holder of coffee cherry or parchment
can sell belcw the daily price offered by the company.

     As an exporter, the company's share   of the export busi-
ness increased from 11 percent in coffee   year 1974-75 to 40
percent in 1976-7'.  The increase is due   to the exporting of
stocks which the company had accumulated   since 1974.




                             77
APPENDIX   V                                      APPENDIX IV



     Exporters are required to submit to the company a copy
of each export sales contract along with green bean samples
for quality testing.  The company has the option of purchas-
ing the coffee from the expo.rter if it believes the agreed
sale price is not consistent with the current world price.

     In 1972 El Salvador began to withhold 20 percent of its
production. This restriction was in effect until December 9,
1975, when the Naticnal Coffee Department released the entire
1975-76 crop for export. An estimated 1.26 million bags were
in stock at that time.

     The reason given for increasing exports and eliminating
stocks was that October 1, 1976, was the beginning of a 2-
year period which can be used as the base period if new
world export quotas are established under the ICA, and El
Salvador wants to increase its percentage of the world mar-
ket. The director stated that his goal was to have a zero
balance of stock on hand for the September 30 ICO counts
in 1976 and 1977.

Private exporters were prohibited from exporting coffee
 'rom October 1 to December 31, 1976, when the company was
selling off its stocks.   However, according to the director,
the current policy is to export all available coffee.   The
goal for 1976-77 was to export 3.3 million bags.

     The government requires also that some coffee be retained
for the domestic market.  To export low grade coffee, the
exporter must deliver one bag to the company for every four
bags exported.  About 200,000 bags of low grade coffee are
 rocessed each year.  While this quota system supplies about
40,000 bags to the domestic market, domestic consumption is
projected at about 175,000 bags.

Cost of coffee

     The cost to produce coffee varies among growers.  The
Ministry of Agriculture estimates of coffee production costs
ranged from 32 cents to 39 cents per pound of green coffee,
depending on efficiency, for the 1976-77 crop year.

     In March 1977 the average amount received by producers
was about $1.82 per pound for a profit of between $1.43 to
$1.50 per pound.  The cost of processing the coffee to the
green bean stage was about 9 cents per pound.

     El Salvador taxes export coffee on the basis of sales
price computed on a sliding scale.




                             78
APPENDIX IV                                         APPENDIX IV




           Price per
              pound                     Tax rate

     Up to    30 cents      10 percent
     31 to    35 cents      3 cents plus 20 percent on amount
                              over 30 cents
     36 to    40 cents      4 cents plus 25 percent on amount
                              over 35 cents
     41   cents and above   5.25 cents plus 30 percent on
                            amount over 40 cents

     The proceeds from the tax, based on a tax established in
1949, go to the general treasury.

     On the basis of a $3 per pound sales price at the begin-
ning of March 1977, the cost to exporters would have been
$2.74 (1.82  paid to producer plus $0.09 for processing and
$0.83 for export tax).

     Exporters pay the cost of transportation, so their profit
would have been somewhat less than the indicated $0.26 per
pound.




                              79
APPENDIX V                                       APPENDIX V




                         IVORY COAST


     Ivory Coast's predominantly agricultural economy is one
of Africa's most prosperous, with a current per capita income
of over $500.  From 1970 through 1975 the gross domestic pro-
duct grew at an average rate of 6.2 percent in constant prices.
Agriculture uses about 52 percent of the land, employs nearly
85 percent of the population, and accounted for 26 to 28
percent of the $3.7 billion gross domestic product in 1975.
Major products are coffee, cocoa, timber, and tropical fruits.
Ivory Coast has an export-led economy and depends on its agri-
cultural products to provide the foreign exchange for imports
from the United States, France, and other European countries.

     Ivory Coast is Africa's largest coffee producer and the
third largest producer in the world ranking behind Brazil and
Colombia.  In 1976 coffee accounted- for about 9 percent of
the country's gross domestic product, 26 percent of total ex-
ports, and 24 percent of total foreign exchange earnings. An
estimated 35 percent of the population is engaged in coffee
production, marketing, and processing.

     In the early 1970s Ivory Coast coffee exports produced
an-average of $100 million a yR r in foreign exchange. Since
the Brazilian frost of July 1975  however, coffee earnings
have risen dramatically.  Total production for crop year
1976-77 was 5.1 million bags.  As a result, Ivory Coast esti-
mates its foreign exchange earnings at over $1 billion.

     Ivory Coast produces almost exclusively Robusta coffee
and is the world's largest producer of this variety.  Robusta
4s better suited to the growing conditions in the Ivory Coast
but has less flavor and aroma and contains much more caffeine
than the milder Arabica grown in South and Central America.
Its main use, therefore, is for blending with the higher qual-
ity coffees into soluble coffee. A small percentage of Ivory
Coast production is used to make instant coftee at a process-
ing plant in Abidjan.

CFFEE PRODUCTION AND MARKETING SYSTEM

     The Ivory Coast Government maintains close involvement
in all aspects of the production and marKetirg of Ivorian cof-
fee through an agricultural commodity price stabilization and
support fund, the Caisse de Stabilisation des Prix (Caisse).

     The Caisse, a state trading corporation established in
its present form in 1964, fixes the price to bc paid to the


                             80
APPENDIX V                                        APPENDIX V



coffee grower and the profit margins allowed the purchasing
agents and exporters.   It also establishes the minimum export
price and realizes any losses or gains that result from world
market price levels.
      Under Caisse regulations, 60 percent of the Caisse pro-
fits must be returned to Caisse reserves where they are used
to stabilize the prices of other commodities, and 30 percent
go toward economic and social development projects primarily
designed to develop Ivory Coast's infrastructure.   These proj-
ects include road construction, port facilities, and technical
assistance to growers.   The remaining 10 percent of the pro-
fit is used to make small agricultural development loans to
growers.   The loans can be used to buy fertilizer, pesticides,
inexpensive equipment, and tools.

Coffee production

     Most Ivory Coast coffee is grown on about 350,000 farms
of 5 to 12 acres.  Only an estimated 1 to 2 percent of all
coffee is grown on large plantations.

     Coffee trees are sometimes intermingled with cocoa trees
and are often neglected in favor of the food crops.  The yield
of these coffee trees is quite low, estimated at about 300
kilograms of cleaned coffee per hectare (or about 250 pounds
an acre).  Under ideal plantation cultivation conditions,
the Robusta variety of coffee could yield 2.4 metric tons per
hectare (or over 2,000 pounds an acre).  The yield has in-
creased very little over the ye-rs, as cultivation methods
continue to be primitive.

     Normally production totals about 268,000 metric tons.
In the 1973-74 crop year it fell as low as 196,000 metric tons
due to bad weather.  Because of a lack of rain in Januar', and
February 1977, many of the coffee trees did not bloom in April
and may ot yield coffee this sason. Estimates of 1977-78
production are as low as 210,000 metric tons.

     After coffee cherries are picked, they are dried and the
cherry is removed to expose the bean.   This process is typi-
cally done in the general area of the farm, and is very labor-
intensive.  Because of a labor shortage in Ivory Coast, much
of this seasonal labor is provided by migrant workers from
neighboring Upper Volta and Guinea. The lack of labor to
care for the coffee trees and to pick and dehusk the coffee
has been a major limitation on the Ivory Coast's ability to
expand its coffee production.   One exporter estimated that
20,000 metric tons of coffee cherries went unpicked last year
because of this labor shortage.



                             81
APPENDIX V                                          APPENDIX V




      Ivory Coast has one modern plant for dehusking, located
in the center of the coffee-growing region near Bouake.
During the 1974-75 season, this plant--operated by a qasi-
government agency known as SERIC--took in 60,000 metric tons
of coffee cherries and produced 32,000 metric tons of coffee
beans.   This was a little over 10 percent of the country's
total coffee production that season.   The government plans
to build 20 more of these plants, of smaller sizes, capable
of processing all the coffee cherries grown.   This would elim-
inate much of the labor problem and allow coffee growers to
concentrate on the growing and picking.   These plants would
also reduce by about 75 percent the number of beans broken
during dehusking, which would increase the amount of coffee
available for export by about 4,000 metric tons without any
increase in production.

     Support   rice

     Through the Caisse, the government sets the price to be
paid to coffee growers.  The Caisse's main objective is to
guarantee a stable income to the growers of eight different
agricultural commodities, including coftee.  By paying growers
a minimum support price for their commodities, the Caisse is
able to insulate growers from market instabilities and to
guarantee an income regardless of the price of their commod-
ities in world markets.  The Caisse will limit the price,
however, based on the international market price of each com-
moditiy it controls and on the status of its reserves.

      Ivory Coast farmers receive some of the highest prices
in Africa for their products and, by developing country stan-
dards, enjoy a comfortable living.   Their income is increas-
ing slightly, but their purchasing power is merely keeping
pace with inflation.   Over the pest 13 years, the Caisse has
doubled the support price from 90 CFA francs 1/ per kilogram
to the current 180 CFA francs.   Most of the icrease occurred
in the past 5 years.   Since the 1975 frost the price of
Ivorian coffee has increased over 400 percent in the interna-
tional market.

     As a result of the pricing system established by the
Caisse, limiting the amount of money that can be paid to
growers and the amount of profit exporters can make, much cof-
fee leaves the Ivory Coast as contraband to neighboring coun-
tries which have no controls over prices and profits. One



1/ At June 8, 1977, 249.3 CFA francs equalled $1.



                             82
 APPENDI" V                                        APPENDIX V



 source stated that farmers can sell coffee in one
                                                   neighboring
 country for 800 CFA francs per kilogram.

      Estimates of how much coffee is being smugg ed ou
 the Ivory Coast ranged from 5,000 to 20,000 metric      of
                                                    tons dur-
 ing the 1976-77 season.

      Production trends

     The Ivory Coast Government believes that its
economic security depends on stable production of long-term
                                                  coffee and
a greater diversification of its agricultural export
                                                     base.
By increasing prices paid to producers for other commodities
and providing other incentives such as free fertilizer,
                                                        the
government can channel grower efforts into the diversified
areas it desires.
     The increase in coffee production since 1955 occurred
because more land was put into coffee production.
                                                    This is
no longer feasible on any large scale. Coffee can
                                                    only be
grown in a few regions of the country below the 8th
and it must compete with other crops in that area. parallel,
Department of Agriculture currently estimates that The U.S.
as 1.9 million acres are presently devoted to coffeeas much
this will expand significantly.                       and that

     Desoite the diversification policy, the current high
world price for coffee has caused the government
                                                  to promote
a short-term increase in coffee production primarily
increased yield on existing acreage. Government       through
                                                 incentives
in the past few years have increased production from
                                                      240,000
metric tons to 300,000 metric tons and further advances
possible up to 360,000 metric tons, or 6 million bags. are
government would like to improve cultivation methods     The
                                                      and in-
crease coffee yields to 1,000 kilograms per hectare.

     The government is also involved in coffee production
through research being conducted on a new coffee variety
called Arabusta that would be hardy and disease-resistant
like Robusta, but would be better tasting with less
like Arabica. Most sources believe it will be 1985 caffeine,
                                                    before
Arabusta is perfected and produced in marketable
of about 5,000 metric tons annually.             quantities

Export marketing

     Ivorian agricultural products are marketed by
serving as brokers on behalf and under close controlexporters
                                                      of the
Caisse for a fixed remuneration. At the beginning
                                                    of each

                             83
APPENDIX V                                        APPENDIX V




growing season, the Caisse determines the percentage of pro-
duction each exporter will be permitted to sell and the fixed
per-kilo remuneration exporters will receive for each market-
ing function they perform.

     Most of Ivory Coast's coffee is being marketed by a few
large exporters.  During the 1976-(77 growing year, 5 of the
34 exporters licensed by the Caisse marketed over 50 percent
of the 285,000 metric tons exported.   Exporters supply most
of the marketing services necessary to move the coffee from
field to market.

     Exporters' agents generally purchase the coffee using
money advanced to them by exporters.  The exporter pays all
transportation costs and is reimbursed by the Caisse upon
submission of a transportation invoice.  Coffee exporters
are reimbursed about $6 million each year for transportation,
or approximately 2 cents per kilo.

     Until the c'      is in warehouses in Abidjan, exporters
must finance the   offee with high interest, unsecured bank
loans.   Once in the warehouse, the coffee can be refinanced
at a lower rate, and the Caisse reimburses the exporter for
storage.

     The Caisse normally pays approximately $4 million annu-
ally to exporters for coffee storage, however, storage costs
have been significantly lower during the past year due to the
efforts for faster export.

     The sale of most Ivorian coffee is arranged through one
of the Caisse's three foreign offices in New York, London,
or Paris.  Sales services performed by the exporter primarily
consist of arranging financing and shipping, sorting, rebag-
ging, and preparing sales documents.

     The Caisse arranges the sale of approximately 70 percent
of the coffee exports and the exporters arrange the remaining
30 percent subject to Caisse approval.  Exporters believe,
however, that the Caisse is considering increasing the amount
of coffee sales it arranges to 90 percent.

     Exporters' remuneration
     Exporters are remunerated a fixed 2.3 CFA francs   or
each kilogram of coffee they export.  The Caisse also reim-
burses the exporters for transportation, storage, shipping,
and administrative costs they incur, based either on actual



                               84
APPENDIX V                                        APP!ENDIX V




costs or on standard costs arrived at by the Caisse at the
start of each season.

     Exporters can sometimes provide the standard cost mar-
keting service; for less than the Caisse reimburses them.
Their profits depend to a large extent on how efficiently
they can provide marketing services, and not on international
market conditions.

Caisse profit or loss

     The Caisse depends on the price of Ivorian commodities
in international markets to cover the fixed grower and ex-
porter payments and all variable costs.  Ca.sse profits or
losses are determined by the difference between the world
market price for Ivorian coffee paid by importers and the
costs of purchasing and marketing the coffee.

     For example, using prices and costs in eff:ct during
the 1976-77 season, farmers are paid 180 CFA francs for a
kilogram of coffee and exporters receive 92 CFA francs per
kilogram for costs incurred in bringing the coffee to market,
plus their remuneration.  Thus, a kilogram of Ivorian coffee
ready for export costs the Caisse 272 CFA francs.

     The custom duty on coffee is 23 percent of a Caisse-
determined base price.   Although the rate has not changed
in recent years, the base has increased substantially since
the Brazilian frost.   Thus, the actual duty paid on a kilo-
gram of coffee has risen about 30 percent from 32.2 CFA
francs in 1974-75 to 57.5 CFA francs in the current season.

                        COFFEE EXPORT COST

                                             (per kilo)

     Amount paid to producer                 $ .767

      Warehouse, transportation, and
        other incountrv costs                   .082

      Customs duty                              .240

      Port cost and other export fees           .018

             Total
                                              $1.107




                                85
APPENDIX V                                       APPENDIX V



     On March 1, 1977, Ivorian coffee was selling in New York
for 1,600 CFA francs a kilogram, so the Caisse's gross profit
on a sale on that date was more than 1,300 CFA francs, or
$5.24 per kilo. Overseas shipping and insurance costs, and
incountry transportation and storage costs would have to be
deducted from this to determine the net profit.




                            86
APPENDIX VI                                         APPENDIX VI


                              MEXICO
     In the 30 years between 1940 and 1970, Mexico's gross
domestic product achieved an average annual growth rate of
6.4 percent, which permitted per capita real income to
almost triple in 30 years. From 972 to 1975, the annual
growth rate dipred slightly t 6.2 percenL. In the 5-year
period ended December 31, 1 9 7 5'r exports averaged 4 percent
of the gross domestic product and in 1975 amounted to $2.9
billion.
     Mexico's mountainous terrain and the relative scarcity
of water limit arable land to an estimated 79 million acres,
or 16 percent of the total. Agriculture, livestock raising,
forestry, and fishing employs 40 percent of the labor force.
Major agriculture products include corn, cotton, wheat, cof-
fee, sugar, beans, and rice. In 1975 agriculture accounted
for 7.1 percent of total gross domestic product.

     Coffee is now Mexico's leading agricultural export com-
modity and is second only to petroleum as an export earner.
Favorable weather conditions increased the 1975-76 coffee
output to a rec-rd 4.2 million bags. Exports were also
higher at 2.8 million bags, 12 percent above the calendar
1975 ttal of 1.662 million bags. Export prices were much
higrer n 1976 and the value of coffee exports totaled $343
million, compared with $180 million in calendar year 1975.
About 70 percent was exported to the United 3tates.   In 1976
Mexico ranked   ixth among coffee exporting countries, with
a 3.9 percent share of the wo.ld market.

COFFEE PRODUCTION AND MARKETING
      Production and marketing of coffee in Mexico involves
privatte rowers, processors, exporters, and the Mexican Cof-
fee Institute (INMECAFE), which was established in 1958 to
help Mexico improve its position in the export markets. It
is a quasi-government entity under the department of commerce
and its functions have expanded to include technical assis-
tance and rMarketing.     Its operating budget comes from reve-
nues from     Fe export taxes. INMECAFE's Chairman is the
secretary          -i.l'-jre, and the departments of the treasury
and foreig       ~,        epresentatives of the coffee industry
are on the bL              actors.
     INMECAFE is        ed in all aspects of production and
marketing and i'        zity includes




                              87
APPENDIX VI                                         APPENDIX VI



     -- setting export quotas,

     -- distributing export licenses and permits,
     -- guaranteeing a minimum price to the producer
        in times of coffee surplus,
     -- testing and determining the quality of coffee,

     -- regulating exporters, and

     -- coordinating joint sales involving export by
        INMECAFE and private exporters.

Production

     There are 97,716 coffee growers .. Mexico with a total
of 356,253 hectares of land under cultivation. Farms smaller
than 4 hectares grow 97 percent of the coffee.

     Historically, Mexico has had relatively low production
yields, but they are increasing.  The government is planning
to spend about $200 million over the next 6 years to achieve
a production goal of 7 million bags in 1983-84 without plac-
ing additional acreage into production. INMECAFE has imple-
mented - formal program providing 171 technicians to work
with the growers on better production techniques, and has
developed new tree varieti:s capable of producing almost five
times the yield of the most commonly used variety. The seeds
of the new varieties are available to growers at no cost.
Processing

     Coffee growers have access to 1,525 wet and 335 dry pro-
cessing plants throughout the coffee growing areas. We were
informed that no grower is more than 6 miles from the nearest
plant. Most wet processing plants, which process to the
parchment stage, are owned by processors, exporters, or
INMECAFE. Over 70,000 small producers have formed coopera-
tives capable of processing coffee to the parchment stage.
Once the wet process is completed, the parchment can be
stored up to i year before being sold to an exporter or to
INMECAFE for dry processing to the green bean stage. Ex-
porters and INMECAFE own and operate all dry processing
plants.

     In early 1977 the price exporters paid producers was
about $138 for the equivalent of 100 pounds of green coffee.
INMECAFE estimates that production costs are about $31 for
100 pounds.


                             88
  APPENDIX VI
                                                    APPENDIX VI



      Open competition exists between the
 INMECAFE. INMECAFE pays a lower price,    exporters and
 benefits not offered by the exporters,   but provides several
 eligibility? fertilizer at reduced     such  as social security
                                    prices, free technical
 advice and improved seeds, payment
 and loans at low-interest rates.   of state and federal taxes,

      Exporters also offer loans on an individuel
 their regular suppliers. These loans              basis to
 ket rate of 18 percent, compared with are usually  at the mar-
                                       loans offered by
 INMECAFE at 10 percent.
      During the period when
 between $133.63 and $138.08 exporters were paying producers
                             for 100 pounds, INMECAFE was pay-
 ing $111.36.
 Export marketing
      INMECAFE, private exporters,
coffee. In 1976-77 INMECAFE had 15and some producers export
ket, private exporters 75 percent, percent of the export mar-
                                    and producers 10 percent.
INMECAFE's percentage has dropped
because of the higher prices paid in the last few years
                                   by private exporters and
because government financing available
                                        to INMECAFE did not
keep pace with the rising price of
                                    coffee.
     Exporters must have licenses and be
Mexican Department of Commerce and       registered with the
                                   INMECAFE. There are
about 800 registered exporters, of
coffee year 1976-77.               which 256 were active in

     INMECAFE has established export
insure that coffee will be available quota requirements to
Every 3 months one representative    to the uomestic market.
                                  each
producers, and the exporters counts    from INMECAFE, the
                                    export stock in warehouses,
from which quarterly quotas are established.

     INMECAFE requires each exporter to
one bag of coffee for domestic          physically deliver
                               use for each two bags to be
exported. Domestic consumption is
million bags annually. At most,    estimated at about 1.2
                                 domestic  coffee includes
about 120,000 bags of export grade
                                   coffee.
     If test results show that the
dards and when coffee for domestic coffee meets export stan-
INMECAFE issues an export permit foruse has been received,
                                      each sales contract pre-
sented by the exporter.




                             89
APPENDIX VI                                  APPENDIX VI




     The Government of Mexico receives revenue from the sale
of exported coffee through its export tax. This tax has
been increased from $12.00 per 60-kilo baq in 1972 to $1.60
in 1975, $58.61 in 1976, and $136.00 as of January 1977.

     As th, tax is a significant source of revenue, the
government is concerned about the export of contraband
coffee. It was reported that about 100,000 bags were
smuggled out of the country in March 1977, avoiding esti-
mated export taxes of $10 million. An official at the
Mexican department of commerce told us that Mexican customs
officials are currently working with U.S customs officials
to design procedures for dealing with contraband.
     On the basis of information furnished by INMECAFE, the
cost of exporting 100 pounds of green coffee during early
1977 was $292 ($138 paid to producers plus $18 processing
costs plus $136 in export taxes).
     At this time Mexican coffee as selling at $315 per
100 pounds on the world market, for an apparent protit of
$23.




                             90
APPENDIX VII                                      APPENDIX VII



               PRTNCIPAL OFFICIALS RESPONSIBLE FOR

                   ADMINISTERING ACTIVITIES

                   DISCUSSED IN THIS REPORT


                                          Tenure of Office
                                           From        To
                 DEPARTMENT OF THE TREASURY

SECRETARY OF THE TREASURY:
    W. Michael Blumenthal             Jan.    1977   Present
    William E. Simon                  May     1974   Jan. 1977
                    DEPARTMENT OF STATE
SECRETARY OF STATE:
    Cyrus R. Vance                    Jan.    1577   Present
    Henry A. Kisinger                 Sept.   1973   Jan. 1977
                   DEPARTMENT OF COMMERCE
SECRETARY OF COMMERCE:
    Juanita M. Kreps                  Jan.    1977   Present
    Rogers C. B. Morton               May     1975   Jan. 1977
                  DEPARTMENT OF AGRICULTURE
SECRETARY OF AGRICULTURE:
    Bob Bergland                      Jan.    1977   Present
    John A. Knebel (Acting)           Oct.    1976   Jan. 1977
    Earl L. Butz                      Dec.    1973   Oct. 1976




175530


                              91