Commodities & Futures: Destroying stock may prove coffee producers' best option

COFFEE-CONSUMING and producing countries are as far apart as ever after the second abortive round of negotiations in London last week on a new international agreement to lift and stabilise prices.

The two sides will return for a third round at the end of September, but the chances of substantial progress are not looking good because of the many complex political and technical obstacles still to be overcome. In fact, the signs are that the coffee-trading nations will be hard put to it to complete the negotiating process by the deadline of 31 December.

Meanwhile, prices remain obstinately depressed. On Friday, some traders were warning that the market, now just above its recent 20-year low, could fall again this week in a delayed reaction to the inconclusive outcome of these latest price pact negotiations.

'Perhaps the rest of the producers ought to take note of the action by Honduran growers who plan to destroy 4,000 sacks to draw attention to their plight,' said Lawrence Eagles, commodity analyst at GNI, the futures broker.

'With low coffee prices a symptom of stocks rather than supply, a stock destruction plan by producers would have a greater effect on the world market price than anything else.'

For the moment, the producers are putting their hopes in a new International Coffee Agreement, which would aim to match supply to import demand through an export quota system.

Differences over how it should be policed resulted in last week's deadlock, which prevented discussions on the other critical elements of the proposed accord - the price-stabilisation range for coffee, the distribution of the global quota among producers and the system for adjusting its size. All threaten to be as controversial as the the control system is proving to be.

Rumours last week that Brazil might break off negotiations and attempt to set up a cartel were dismissed by its negotiators. 'Brazil remains as committed as ever to a new agreement,' said Clodoaldo Hugueney, its chief negotiator. 'But for the commitment to remain we need progress in the negotiations, or the government clearly risks losing the support of the private sector.'

Frustration on the producers' side was highlighted by their rather intemperate statement blaming the current impasse on the consumers' 'unreasonable attitude' and by their decision to stop prematurely on Friday the negotiations (a term that glamorises the exchanges of recriminations that actually took place).

The United States came in for most stick, but the producers' strictures were also directed at the European Community. Both stand accused of having undergone a 'radical change of position' on the question of the respective roles of producers and consumers in controlling exports. And it is true that neither is prepared to accept the principle of equal resposibility. They argue that the main burden of ensuring future quota limits are not exceeded must fall on the producing countries to avoid the re-emergence of the dual market, which bedevilled previous price pacts.

Until quotas were suspended indefinitely three years ago, there was a dearer ICA-controlled market and a cheaper unregulated one, where non-members could buy their beans.

The US, which never misses an opportunity to stress its diminishing political support for renewing market controls, and its limited room for manoeuvre in the ICA negotiations, is adamant that it will only join a new accord that can stop a two-tier market from developing again. 'The US will not return to the old system,' said Myles Frechette, Washington's chief coffee negotiator.

His blunt message to the producers last week was that if they wanted a higher price for their coffee they would have to accept the 'lion's share of policing the system'.

Under the old control system, coffee shipped illegally (which meant without proper documentation showing that it was part of a country's export quota allocation) was not allowed into the pact's consumer member countries. It therefore ended up being dumped in non-member countries.

Under a new ICA, according to the consumers' current position, there should be a 'free flow' of coffee once it leaves the producing countries. Undocumented coffee should be allowed into their territories, leaving it up to the International Coffee Organisation to investigate its provenance later and impose penalties for quota infringement.

The consumers involved in negotiating the new ICA simply want access to coffee 'on terms and conditions at least as favourable as those offered to importing non- members'. If shipments are made illegally in excess of quota - and past experience shows that cheating is inevitable - any fall in price triggered should be to the benefit of member importers as well as non-members.

(Photograph omitted)