Commodities and Derivatives: Coffee producers brew higher pricesC

THE PRICE of coffee in the shops in Britain and the rest of Europe is on the rise for the first time in about four years. But the industry insists that the increases are simply to cover higher raw material costs - not to lift profits.

Wholesale coffee beans make up perhaps 20 per cent of the price of jars of instant, which in turn account for at least 90 per cent of all UK coffee sales. And those beans now cost nearly 60 per cent more than the 20-year low of 45 US cents a pound touched in mid 1992.

Coffee-growing has been unprofitable nearly everywhere for several years, with no incentive for farmers to invest in future production. After years of surplus stocks - which were kept off the market by an international export quota regime until the accord collapsed in 1989 and the floodgates opened - production has turned down and the coffee market is now moving into deficit. Wholesale prices have strengthened as a result.

Meanwhile, consumption is stagnating, despite falling real retail prices after inflation is taken into account. Figures from Nestle - which has more than half the pounds 510m British coffee market - show that, in nominal terms, its popular Nescafe brand costs about the same today as five years ago, despite an increase of 12.5 per cent last month.

Coffee demand is rising here, but growth generally is being checked by competition from soft drinks and the fall in imports of beans and soluble coffee in the old communist bloc. Market saturation in some key consuming countries is also limiting the scope for growth.

The decision of Brazil, Colombia and other big producers to restrict supplies has also forced up wholesale prices. Dismayed that the annual global value of coffee exports had halved to dollars 6bn ( pounds 4bn) between the mid 1980s and 1993, they acted to improve sales returns last year after failing to negotiate a new price- boosting export quota regime with the US, Europe and other consumers. Since last October, they have been operating their own supply- management scheme, under which they must put a ton of coffee into storage for every four exported. Yet while their price goal is a fairly modest 80 cents a pound, it is proving hard to achieve.

One reason is the huge problem producers face in trying to shift stocks - and therefore control over prices - to themselves from the consumers. Industry figures show consumers' inventories may have fallen by 3 to 4 million 60-kilo bags from their record of 22 million, but this still leaves them about 6 million above normal.

Persistent doubts in the trade about the long-term survival of the price-support scheme, mainly because its implementations to date in Brazil have been such a shambles, have acted as a further check on the market's upward movement. Brazilian export retention targets are constantly missed.

But Neil Rosser, coffee analyst at the commodity house ED&F Man, says the scheme is not about to collapse: 'The producers are prepared to sit it out for a while yet.'

If export retention does prove its worth, the producers want it to become a new international price- stabilisation tool under a future treaty between them and the consumers. Since the US has no interest in such a pact, reviving the traditional export quota mechanism is no longer seen as viable. But retention could just work and would, argue producer officials, bring benefits to both sides. Consumers would be given a say in the scheme's operation and price goals, and as an element of an international treaty with legally enforceable sanctions, its long-term success would look much more assured.

Producer cartels, after all, nearly always come to grief sooner rather than later.

However, a new producer-consumer International Coffee Agreement seems a long way off. The European Union, for one, is not keen. 'The consumers will have no interest in talking about one until they are squeezed by the producers through higher prices,' says Lawrence Eagles of futures broker GNI.

When the two sides met last week at the London headquarters of the International Coffee Organization to discuss future co-operation, the producers accepted that nothing could be done jointly with consumers in the short term to regulate the market. But they urged that talks should continue on reintroducing market-control measures, perhaps eventually through a new ICA.

No one foresees a return to past lows in the coffee market, although the collapse of the retention scheme would give it a nasty knock. But analysts say that retail prices - which always lag the wholesale market by at least six months - are unlikely to come down.

(Photograph omitted)