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This preliminary report on the coffee outlook has been

prepared primarilir to meet the Bank's needs for estimates of member

countries' prospective earnings from coffee exports.

The estimates in this report reflect the current judgment

of the staff, arrived at after a review of available data, estimates

and opinions. It is intended to review these estimates periodically

to take account of new developments, or to modify judgments where

warranted. Comments are therefore invited to facilitate this process

of recurring reappraisal.

TABLE OF CONTENTS

Page

SUTARY i - iii

THE flTEMDIATE AND FUTURE OUTLOOK FORL CCJiYFEE

I. Introduction 1

1945-1949 21Qcfn_i Q~~ 2

1954/1955 Season 2Presnt 1955/56 Seaon 3

II, The fl,+o1,r fn-r th 1956/57 SeIson 4

III. The (u,tlookc to 1960 6

TTU1nil+ae1 Price .i1 Yr'+.infc Activities 8

IVo The O-tlook After 1960 10

PLrice T eve-ls 1'0The Relative Cost Situation 10n__---'I 1- D01-d Z, s E

Other Latin America 11Africa

Possibilities of Technological Improvement 12Production and Consumption in 1960/61-1964/65 12Limsitaticns of the Estimates 14

APPE17LhICE

I. Forward Estimates of vcorld Exportable Production 1957-1959

II. Difference in Forward Estirmates of Coffee Production 7Iadeby Independent Studies

III. Forward Estimates of world Consumption in Importing Countries,1957-1959

IV. Comments on Demand Elasticities

V. The Effect of Competitive Conditions on the _jorld CoffeeMarket

Tables

Charts

SUT'1ARY

etJde-lue o-P,ents 1n coffPee ia period of rel _ ivelvstable prices until Inid-1949, during which time stocks accumulated before

and durirg the. v,~ar V;e~re -e-g' I?a lir -,,g5red . t T,n± n 1Q)ie coffee

prices rose sharply because a short crop in Brazil coupled with reducedstocks threatened to make s.uppl 4 Aes -adqa to r-+et risinc consuAti n

requirements. The price of the Santos 14 grade rose from less than 300 inM,id-1949 to an average of over 50¢ in each -ear 1950 to 1953.

'w5hile this price increase ,reatly stimUl4ated rew pantings ofcoffee trees in many areas, coffee output could not rise promptly, becausethere is a lag of fou-r to five years between planting and the first co-numercialharvest. Late in 1953, another bad crop appeared likely in Brazil dueto Irost. Prices rose sharply to a level of almriost <,-l per pound by early1954. When prices began to decline in the spring of 1954, Brazil atten ptedto maintain these high prices Iby limi ting exports. 'ince supplies i'ron.other sources aided by liquidation of stocks in consuming countries viereadequate to meet consumDtion needs and Brazil's foreign exchange reserveswere limited, Brazil reduced the level of price supports on several occasionsto maice its exports competitive.

Because these actions were belated, the volume oI coffee exportsfrom Brazil fell sharply in 1954 (3O, below 1953 levels) and stocksaccum.ulated in Brazil, the iirst substantial increase in more than a decade.It is anticipated that a further substantial increase in stoclrs w-ill occurin the year ended June 30, 1956. In 1955 and the first half of 1956 r Santos 4prices have ranged between 50 and 600 per pound, approx-imately the samelevel as in the 1950-53 period, but down substantially from the levelsreached early in 19514

Because a poor crop in Brazil is anticipated for thie 1956/57season, largely due to frosts in the important Parana area late in 1955,world supplies and consumption during this period are likely to be in closebalance at about 35 million bags. Ccnsequently, no significant pricechanges are anticipated.

It is estimated that world exportable production will rise froma level of 35 , rmillion bags in the 1956/57 season to an average of 142million bags in the three succeeding years. Inasmuch as consumption islikely to average only about 37.5 million bags per year, surpluses,particularly of Brazilian and 'African varieties, are expected to emerge onan increasing scale in this period writh a strong downward pressure onprices. If prices were to fall, consumption mniglht be further stimulatedand stocks might be accumulated in consuming countries, diminishing theburden of carrying surpluses in producing areas.

Because Brazil has frequently undertaken price stabilizationschemes in coffee, it is concluded that it will undertake to maintain prices,for a time at least, at about 500 per pound Santos and that it will bearthe main burden of such price supporting activities. If wiorld exportable

ii

production attains or exceeds the 42 million bag level (average for the3--year perlod), the cost of ma-ir,ItaLUing pri±ce supporUts at 0 per ond or

more in Brazil would appear to be excessive particularly in view of theprobable resistance of b-uyers in expectation of a fall 1n prices, The mostprobable course of events is that price supports (in terms of dollar prices)would be gradually reduced to a levei approximating 4u0 per pound, as onpast occasions. The consummation of an effective international agreementfor coffee price stabilization which couid spread the burden of pricesupporting activities over a larger number of producing countries isnot considered likely in the near future,

On the assumption that by 1960, Santos 4's will be priced at about400 per pound, it is estimated that the probable level of world productionwill, in the following five year period to 1965, rise only slightly on anoverall basis. A decline in Brazilian output is anticipated, which wouldbe somewhat more than offset by increases in other areas, especially Africa.However, world consumption can be expected to rise more rapidly to a levelof about 42 million bags per year, reflecting mainly the anticipated groithin both population and per capita real income and the stimulation toconsumption afforded by lower prices for coffee relative to other cornmodi-ties. On these assumptions, the probable average surplus of exportableproduction over consumption is estimated at about one million bags per year,or slightly over 2% of estimated world supply. If the average anniualsurplus is in fact limited to this level, the average price for Santos 4'sfor the period is not likely to vary greatly from the assumed 400 levelat the start of the period.

On the other hand, it is emphasized that the estimate of virtualequilibrium at about 400 per pound after 1960 is predicated on severalassumptions, which appear reasonable but may not be realized, namely

1. Increases in average annual production above 42 millionbags after 1960 will be limited, because the assumedprice of 400 will tend to reduce production in Brazil,especially in Sao Paulo and reduce the incentive fornew plantings in other areas.

2. The reduction in price w ould also tend to increase percapita consumption somewhat more rapidly than has beenthe case over the last several decades.

If, for any reason, prices over the period 1957-60 are maintainedat levels higher than the postulated level (a decline from 50¢ -60t a'tthe outset to 400 at the end of the period) the surplus between exportableoutput and consurnption in importing countries might increase substantially.Such higher prices would stimulate new plantings and retard the movementof land and labor out of coffee into other agricultural pursuits and alsotend to retard the potential growth of consumption. If this were to occur,

iii

the achievement of supply-demand equilibrium at 40¢ per pound Santos 4'swould be rendered diLficuLt, if' not impossibUle

Finally, it should be noted that the supply, consumption and price

estimates are expressed in terms of averages for a period of years, becauseunpredictable year-to-year variations o' -weather in coffee growi.ng areascould appreziably affect output and to a lesser extent prices in any singleseason,

THE Ii 31LDL. AND FUTUtZE O'JTLOCK FOR COIFTEE

To T-+ _rl,, +in

1J; coJP. _1,_ MLIKE-t 1- 0 L S J 1 Q en Vrea 1-..1- - t ' c- to + +h

inability of producers to regulate production in relation to world consumption.

There is a lag of four to five years between the planting of newtrees and.he first-CO- c toercial ha-Ves-6 I capacity to produce car.not

be increased sharply Y immediately shortaces in supply become apparent.- -~~~~~ r' ~ ~ ~ ~~ ~ ~ ~ -1 tz-1

ThisL HneanU UiaL a peidUU of hi.Lgh priuc gjI1 aL.Ly preva±±- v4±1'ils -c iiuu-

producers to overplant. This has in the past resulted, after a time lag,in the opposite situation of surpluses and low prilces. Consequeutly,production has been either too large or too small over considerable periodsof timre 0

A period of high prices and overexpansion occurred in the late1920's followed by overproduction and low prices in the 1930's (see ChartsI and II), The disrupu. -ons of vorld l,ar II cau-sed the industry to losetemporarily its European markets (see Table 1)2/; curtailment of the largeUnited States market also occurred in somie years, due to shlipping shortages.

Before World Vicar II, Latin America accounted for aLmost 90', ofworld coffee exports, with Brazil alone accounting for well over half.The remaining 30% or more was about evenly divided between Colombia and therest of the area taken as a whole. Africa's share which has grot,rn steadilyhad reached 8/% in 1935-39, outdistancing Asia and Oceania (see Table 2).

African production has continued to increase steadily enablingit to acc unt for 20% of world exports in 1955, reaching a level (6.9 millionbags) three times the 1935-39 average. By contrast, exports from LatinAmerica as a whole were only about 9%0 greater; an export increase of over40% in countries other than Brazil being offset by an actual decline ofaLmost 10% in Brazilian exports. As a result, in 1955 the share of Brazilin world exports had fallen to 41% as contrasted with 60% in the 1925-34period. Y

1/ Some increase can be induced by better care of' trees, the use of ferti-lizer, more careful picking, etc., but in the short run this is fairlylimited in scoDe.All numbered Tables are found at the end of the report.

3/ Brazil's exports in 195h were even lower relatively (37%), but this waslarE:ely due to an unsuccessful attempt to maintain high export prices,describhd hbl-ow.

-2 -

19Q45-l9b9

Prior to 1945, coffee countries had experienced depressedconditions for fifteen years. In the i-mLediate post--ar y-ears, ho-ver,the capacity to produce had been reduced to a point where annual exportableproduction was 1less than the amnual level of consumption in importlngcountries. The deficiency was miade up by drawing upon the Brazilian stock-pile which had accumulated during the war years. (See Table 3).

The use of Brazilian stocks held coffee prices relatively low.Prices did rise during these years (see Chart I), but the rise was smallerthan would have occurred lhad there been nc stockpile,

1950-1953

When it became apparent in the fall of' 1949 that the Brazilianstockpile of surplus coffee would be exhausted before increased productionin line with rising demnad could occur, (see Table 3) a rapid rise in pricestook place. The price for Santos 4's in 1949 prior to the rise was about27650 per pound at New York. The average for 1950 was 50.5¢.

Coffee prices remained in the 50 to 60 cent range for 3t yearsfrom 1950 through mid-1953. (See Table 14 and Chart I). This level wasextremely attractive to coffee producers and the rate of newf planting wasstepped up considerably, particiularly in Brazil and Africa, thus presagingan increase in production from 1955 on.

IIeanwhile the world coffee position ti ghtened. By mid-1953season, Brazilian stocks had declined to about three million bags (Table 3).The Brazilian frost of July 1953 brought fears of a much lovier supply inthe 1954/55 season. 17 This precipitated a wave of speculative activityand stock accumulation in importing countries beginning in late 1953. Greencoffee prices rose at one tiL.e to almost one dollar a pound early in 1954.The average for 1954 w2as 79.30 for Santos 4hs. .

1954/1955 Season

High prices reduced the level of world consumption. The declinein exp orts was -much greater than the reduction in consumption because stocksin importing countries also were lowered throughout the 1954/55 season.

/ Export and imnort trade data are comDiled on a calendar year basis,whereas the coffee production year and production estimates are on aJTl vr/Juane year.All prices in this report are based on New York quotations, unlessother¶ense indieat ed.,

Several factors account for this. The speculative boom ended abruptlyin the spring of l95 on news that Brazilian 195E-5_ production would behigher than originally anticipated 0 The futures market wleakened to amuch greater degree than the spot market, +hus providing *aeuatehedging facilities. Also the trade did not have su-ficient financialresources to hold A atnn~ hi- prices.,

- 3 -

World trade in coffee was reduced from 34.6 million bags in 1953 to 28.9million in 1954 (Tables 5 and 6). Coffee prices began to decline.

Brazil tried to peg prices at the high level attained in the spring

of 1954, but was unsuccessful. The sharply reduced volume of trade and

competition among exoorters for this trade caused non-Brazilian prices tofall. Brazil had to follow suit and reduce her prices in terms of foreigncurrencies. These price declines were accompanied by two currency adjust-ments - one in August 1954 and the other in February 1955 - which maintaineda high cruzeiro nrice for coffee, thereby cushioning the impact of the pricedecline in terms of foreign currencies, on the Brazilian producer. TheSantos 4 dollar nrice returned to the 50-60 cent range of early 1955.

This action did not prevent a drastic fall in Brazilian exportsof 25% (see Table 3). Brazil ended the 1954/55 season (June 30, 1955) witha stock of 6.5 millinn bags, as comoared with 3.3 million at the beginningof the season. The government segregated 3.2 million bags of this stockfrom commercial channels as part of its rnrice support operations.

Present. 1955/56 Season

World exportable production is est-imated at 39 million bags, while

imports are estimated at 35.5 million bags, indicatirg a probable surplus of3.5 million bags for the season. Imports probably exceeded actual consumptionby 1.5 -2.0 million bags, since the lower prices at the start of the seasonencouraged stock replenishment, a tendency accentted by fear that the suirpoly

of mild coffees would be short due to bad weather in producing areas. Stocksf green cofee in hu1e U .S. r- os - by 1 .000 bags in the twelv e months ended

June 30, 1956.

Within the overall surplus position, however, a shortage of highquality coffees (both mi'ds and good quality Brazilians) xi-sts. On tl-eone hand, the output of mild coffees has been reduced one to two millionbags by poor weather conditions in Central America and Colombia. On theother hand, Brazilian exportable production has risen sharply to almost21 m,,illion bags but the quality is generally belvow average.

The consequence of this mJxed situation is the appearance ofdivergent short-term price trends. 1/ Colombian Manizales, a typical mildtype, rose to 78o per pound in Jly 1956, whlile Brazilian soft coffee prices,represented by Santos 4hs, have risen to only 590. Lower quality Africanrobusta coffees, however, have sold below 40¢A. Such -wlde differentiasbetween general tvpes 2/ are abnormal.

1/ Historically, prices have moved more or less in unison with a relativelys-mll vr-iatJon in discoun.ts and premi l for diff'erent grads and tvnes.Santos 4's and Manizales coffees have usually reflected a 2 to 4¢ perpon.d difference on an annual average basis (see Table 4). In the four

years, 1950-53, Santos 1ts averaged 54.10 per pound, Manizales 57.2¢and/Se Apngolas I for adsci6.1 o (see Appends a d c

2/ See Appendix I for a description of tyypes and grades of coffee.

The 1955 frost in Parana, has strengthened prices in anticipationof the effect of reduced supplies in the 1956/57 season. This is the secondsevere frost to hit this Brazilian state in three years. Just what the levelof production will be is difficult to predict. The Brazilians have beensteadily reducing their estimates of the exportable crop to as low as 10million bags, while the U.S. Department of Agriculture has recently releaseda forecast of 14.9 million. No reliable figure will be available until someidea of the volume of registrations1 ! is obtained late in 1956.

II. The Outlook for the 1956/57 Season

The chief factors which will affect the world coffee market inthe 1956/57 season are:

1. A reduction in total exnortable production, as cownparedwith the 1955/56 season ?/ but a very good mild crop. 3/The nronAent of a. sArn increase in Brazilian nroductionin the following (1957/58) season.

2. A continuing strong demand from importing countries forcon'smp-Ption bhut. nvrhnhlbv not. for st.oe-k ar'rum=1,qtijnn

3' Adeq1ate carryover stocks. If Brazil's1 p roducmtion isinsufficient to meet export demands, there are adequatest ocks 3 upon. v.-yich to A 0r T?n mi1Q5, stocks approximated

6.5 million bags and may exceed 10 million bags by mid-1956,but part of the stocks are held by thfe - -an -- nve ient

and its policy on releases is unknown.

4. A relative shortage of mild coffees during the first halfofi th.e season and perh.aaps of hig ,gn quaJity soft Br-azil

throughout the whole season, with some possible shift indemand to the cheaper coffees, if present wide pricedifferentials between milds, soft Brazils and robustasco- U

1/ roducers IIiust register w±Ur agec the. coffeeL the= .LU laIiy W±ish to

ship out of the producing areas. The large proportion of any one cropis registered in the same crop year-, This pro-vildes an accur-ate estimateof the size of the crop.

2/ Tentative estimiates are about 31 to 35 million bags, but if the lowestimate of 10 million bags is used for Brazil, the total would be muchsmaller than this.

3/ Colombia and Central America are expected to have very good crops thiswinter.

Total exportable production in L956/)U , nrless Brazils shareexceeds about 13 million bags, is likely to be less than world importrequirements. Exports should appruximate 35_36 ,million bags, assuminga continued growth in consumption, but little or no increase in stocksin consuming countries. Under these circumstances, Brazil may ha-ve anopportunity to reduce her recently accumulated stocks of coffee byseveral million bags.

There would thus appear to be a reasonable prospect f'or sub-stantial Brazilian exports at prices in the 50-60¢ range for Santos coffee,if Brazil ?makes appropriate releases from stock. Delays in releasing suchstocks, 1/ while tending to raise prices fc2 Barzilian coffees, would haveunfavorable effects in the longer run. Actions wnich have the effect of'reducing the price spread vis-a-vis milds and widening the price spreadover robustas, would encourage roasters to substitute other coffees forBrazilians. Moreover, roasters sensing that the supply shortage of

Brazilian types was likely to be short-lived would have a strong incentiveto minimize stocks (especially toward the end of the season) in the expecta-tion of replacement at lower prices in the following season. This tendency

would be accentuated if prices rose sharply above the 50-60¢ range.

In the very short run, demand is largely influenced by the roasterswho seek specific types of coffees for their blends. It is the consumers,

however, who ultimately decide the types of coffee they wish to purchase,They have, as always, a choice between roasted blends but with a pricespread much wider than usual. Should this cause them to shift to the lowerpriced blends, then the demand for mild coffees and the present pricepremium over Santos 4's would contract.

It appears likely that the premiums for milds over Santos 4'swill continue to be unusually high until the supplies of milds offeredincrease. The big increase in mild supplies is expected in the late falland winter season, as Central American, African milds and half the Colombiancrop will then come on the market. The premium on mild coffees should then

decline toward a more normal relationship with Santos coffee, by mid-season(November/December). The futures markets partly reflected this expectationin August 1956; milds for September delivery were selling at a 20¢ premium,while the premia for December and March were 15¢ and 130, respectively.

African total exports, which are now predominently but notexclusively robusta types, rose to 6,9 million bags in 1955s as comparedwith 5 L million in 1954 and further increases may be expected. The pricesof lower quality robustas and hard Brazilian coffee may undergo furtherdec ines from nresent levels, and robusta coffees will do well to remain inthe 30 to 40 cent range basis in New York during 1956-57. Price supportmeaslres may hA adonted The French authorities have recently initiatedsuch a policy in West Africa by buying up sizeable quantities. No information

is presently available cnncerning future plans for the disposition of thesepurchases.

11 Brazilts exnorts in the 1955/56 season exceeded 17 million bags. Ifexports in 1956/57 merely approximate current production available forexport., the exrport. volume could decline as much as LO%. Very substantialprice rises would be required to maintain proceeds of coffee exports at19F5/ l levels, unless stocks were drawn down,

-6-

III. The Outlook to 1960

Decause of tlhie 'lag beteen planting and 1vrestin, prouctionbefore 1961 cannot be influenced by new planting decisions taken in the near

future. For this reason, the upper limiit of probable output untiJ 1961cannot be appreciably affected by future price trends, but output may beadversely affected by poor weatlher or sharp price declines. On the other

hand, price trends in the next few years may have ccnsiderable effect on

new plantings, which would in t-urni determine very largelyr the level of

output in 1961 and later years. For these reasons, prospects for coffeeproduction, consumption and prices are analyzed for two per-iods, (a) mid-

1957 to mid-1960, (b) the following five-year period.

The important elements likely to determine the trend of events

in the next few7 years after the i956-57 season are:

1. The level of output from trees already in productIon andfrom new trees already planted, in toto and by types ofcoffee.

2. The rate of recovery of production in Brazil from the1955 frost and the probable incidence of further frosts.

3. The annual growth in world coffee consumpticn, in totoand by types, arisin- from increases in populationi andin per capita real incornes as affected by changes, bothin the price of coffee and in tastes for the varioustypes of coffee.

Estimates have been made of prospective levels of production in1957-60, shown in Appendix I. Reasons for the difference between these andother estimates made by the U.S. Department of Agriculture and the Inter-

American Economic and Social Council are given in Appendix II. In

Appendix III, levels of consumption have been estimated for 1957-60 on the

basis of expected changes in population and incomes. Estimates of price

and income elasticities (made by others) are presented in Appendix IV.

The tables below contain the main conclusions of Appendices I

and III in terms of estimates of the levels of world exportable productionand consumption in importing countries.

Estimated Average Annual IVJorld Exportable Productionand Consumption in Importing Countries, 1957-1959 ~J

Exportable production 42.oConsumption 37.5

Surplus .7

These estimates relate to the crop years1957/58 through 1959/60.

- 7 -

The conclusion is that, assuming coffee price levels of 1950-53{~~~~~~~ - _ - -- _ _ - --- - - .. _ - ._ ..... . 1. 1 - ,- n 1 4(5h4yi for Santos) conU e,I U' al CtV- -,1i OUrl P Lus VA o Cut i42m i.lli0n

bags will occur. Since it is very unlikely that producirg countries couldeffectively IJituhlold f0l-or a consideraule perioud reC-rng spluses of suchmagnitudes, the effects of these potential surpluses on prices, and ratesof output and consumption are further cor- dered belo-w.

A comparison of producticn and consumpption by types of coffeereveals that the estimated surplus is likely to be concentrated in Braziliancoffee and to a lesser extent in robusta cofiee. Tne market fcr mildswolId be more or less in balance, V

Estimated Average Annual World Exportable Productionand Consurntion in Imoporting Countries by Types of

Coffee 1957 - 1959(hillion Bags)

Total Brazils i:ilds Robustas

Exportable production 42.0 19.5 15.0 7e5Consumption 37.5 16o0 1500 6_5

Difference +405 +305 - +1.0

The probable alternatives of market developments may be broadlysummarized as follows:

1. Vigorous competition between producing countries for exportmarkets. This is most unlikely to occur. The probableconsequences of such a situation for coffee prices,production and consumiption are discussed in A'ppendix V.

2. An internaticnal agreement for the regulation of supply,prices and surpluses. This is unlikely to be attainedunless sudden and sharp reverses force an accord onproducing countries. Such an a£reement has been discussedin the past but has not yet materialized.

3. Unilateral price support and supply control measuresundertaken independently or semi-independently are themost likely possibility in the next few years. Thissituation is discussed below.

The reader should note that the quantitative estinates presented areneces-sur 1aril crucle-

- 8 -

TTnil a4ter- I Pice Supporting Activit I -u ilL.dA _.. a l ±jr . _)±J1JJ I.Z J V.LU.LZ_

ThI'e Brazilin. UUovernUmen1 Ihias or, numerous occasi1ons 4in tLhe lastthree decades undertaken to withhold supplies from the market, when itconsidered th -au prices would llke.Ly falL sh-ply 1 Uthe absenic o s-uch

controls. Various devices have been used, and at times successfully, forshort periods. The greatest successes have occurreu -wen a large crop inBrazil was followed by a subnormal crop, which relieved it of the necessityof further support purchases and at times made possible liquidation ofpreviously acquired stocks.

Because of the importance of coffee in the Brazilian economy,removal or lowering of price supports has frequently been accompanied by areduction in the external value of the currency, either directly and openly,or in recent years by allowing coffee exporters to receive a larger numberof cruzeiros per unit of foreign exchange. The effect in either case hasbeen to keep the cruzeiro price of coffee more stable than its foreignprice. Because production costs did not usually rise promptly and sufficientlyto offset the reduced foreign exchange value of Brazilian currency, thecoffee producer was benefited, a factor which tended to maintain productionat higher levels than would otherwise have prevailed. I/

It is widely believed that Brazil is likely to continue its effortsto maximize foreign exchange earnings in the short run by measures calculatedto support coffee prices. The success of such policy will greatly depend onthe level at which it is attempted to maintain the price. If the chosen levelis too high in relation to the generally expected future equilibrium price,Brazil is likely to encounter severe short-term resistance of buyers, with aconsequent loss of current foreign exchange earnings. In the recent past,when foreign exchange earnings have tended to fall sharply, Brazil hasresorted to meeting foreign price competition, while alleviating to somedegree the impact of such price reductions on its coffee growers. Thus,in 1937 and in 195h, Brazil has dramatically reversed its traditional roleas a price supporter and for a time pursued a more aggressive policy ofincreasing export volume, regardless of immediate price consequences. Anattempt to hold the price at too high a level-may also have unfavorablelong-term consequences for Brazil since it could encourage an expansion ofproducing caDacitv in other coffee countries above the level which wouldotherwise occur.

If, however, the supporting activity is exercised at a morerealistic level. nrices will not likely fall as rapidlv or possiblv as faras under a more fully competitive situation. While such price supportingactivities may impose a burden on internal finance; it is likely that theBrazilians will pursue such a course in order to maximize their foreignexchange receipts,

1/ At present, the effect of Brazilian foreign exchange regulations is tofix a low rate (relative to most other commodities) in cruzeiros perdollar on coffee exports.

-9-

In view of the expected magnitude of the surplus supply of coffeewhich would result if Brazil attempted to support prices at above 50¢ perpound, the most probable course of events is that price supports will beperiodically lowered during the period by Brazil toward a level of about 40¢for Santos 4's (delivered New York). t A corresponding price for mild coffeewould be 42 to 450., assuming a sufficient degree of substitution betweenSantos and mild types to maintain a range of annual average price differentialssimilar to those shown in Table 4.

A preponderance of robusta coffees is a new element in the coffeepicture and little is known as to its long-term price relationship to theother coffee types. However, it is a very poor quality coffee by manystandards. It is not used in the United States except in instant coffeemanufacture and in the cheapest blends of regular coffee to a small extent.

With a sharp increase in the volume of output, such coffees mayfall to a substantial discount Lrom Santos and mild coffees. A probable rangeis from 20 to 300 per pound. This allows for quality differentials as betweenthe different grades and qualities of robusta coffees within the general type.

The proportion of lower grade coffees in total world supplies islikely to rise gradually. Price differentials between those and the mildcoffees may widen; however, the relative increase in soluble coffee, whichpresently involves a relatively large use of robustas and small changes inblending practices involving greater use of robustas or other lower gradecoffees may be encouraged by such widening of price differentials. Whilethis factor will bear watching, definitive conclusions as to the degree ofpossible increased use of robustas and the extent to which differentialsbetween grades will change, are not now possible. 2/

It is obvious that in any given year, if exportable productionor demand varies greatly from thp estimates cited above; nrine estimatesshould be adjusted for such variations. The greatest variation is likelyto be on the side of production. The h2 million bag average implies arising trend in production of 5% per year or more during the period in theabsence of marked weather variations. Consumption aside from variationsdue to restocking and destocking, is unlikely to rise more rapidly than about2-3% per vynr. nonsq,enintlyv extpnt fnr unpredirtab1P large varintionn in

weather (such as frost), the probable trend would be for the annual surplusto be on a rising scaTh.

1/ nn the assumption that al1 nrdiiing coumntries followed policies of"clearing the market", avoiding governmental restrictions on movementto ports, price minima, eto., it is esti.amted that prices (Santos e Is)might fall to 350 per pound or less, depending on the extent to whichroaster .,-A rn.dcni1m. dne A e-soAndedA to nrer npc anA charges *r

production responsive to price. As pointed out above, it is highly- ' '- ely , 4how ev er, tha -- 'I, a-olc wo I 'd- -be - adpe in Br azl orLUUI.4.NJ.Y,' J1tJVMVV V.L , V41C4V OLLL.3. a IV-L-L%..y ViVU.Lt.L L'~ CLUIJV~_ L~L LJJ1.L aCL.._L 'i.L

Colombia.2/ See A-yperldtix III for u rLLLti Ui Lon reet- trendUs in sol-UbUUle coffte.Ue roastigS,

- 10 -

If Brazil adopted a less restrictive policv on exports, i.e.perrmi,tted the export price to reflect the expected surplus more prcmptly,the price might fall to 400 eerly in the period. At this lotier supportprice, its burden of carrying stocks would be greatly reduced. Importingcountries would carry somewhat larger stocks, consumption would likelyincrease some-rhea.t mriore rapidly and the incentive for new planti.n$s both inBrazil and elsewhere would be reduced. The impact of such lower prices onproduction would likely be greatest on the older areas of 'razil, parti-cularly Sao Paulo.

on outputThe effects of such a policy/would be more apparent, however, in

the succeeding period than in the 1957-60 period when the price reductionsoccurred.

IV. The Outlook After 1960

Developments on the coffee market after 1960 will depend largelyupon the factors listed below.):

1. The price level prevailing in the preceding years.

2. The relative cost situation in producing countries.

3. The degree and type oi goveernment intervention inproduction and narkleting.

Price Levels

It has been concluded in the preceding secticn that under conditionsenvisaged, coffee prices are likely to settle by 1960 in the 40 cent ran-efor Santos 4's, 42 to 45¢ for mild coffees and 20 to 300 for robustas. Thediscussion below is based on the assumption that such prices will prevailby the 1960/61 season.

The Relative Cost Situation

A wide range of costs prevails in the different coffee producingregions. A reduction in prices will, therefore, affect the pattern ofproduction in different ways. Each general area must be examined individually.For this purpose, normal weather conditions are assumed.

Brazil

Costs of production are lowest in the new producing regions ofParana whereas they are highest in the older producing regions. In SaoPaulo, where fazendas predominate, the lower prices will have the elfectof reducing production through a stepped-up rate of culling of low yieldingtrees and a shift into other forms of agricultural enterprise. In most

- 11 -

Brazilian states, production is on a miuch smaller scale than in Sao Paulo

and producers have lower costs in the comuiercial sense. In these states,

however, the quality and type of coffee is lower than in Sao Paulo and

Parana. Prices received for these lower qualities therefore, -ill more

closely approximate robusta price levels of 20 to 300 per pound (Few York

basis). At such price levels, the doirntrend in production in evidence

before 1950 should be resumed.

Other Latin A:merica

Costs in the mild producing countries also are high but there is

a direct relationship between coffee prices and costs of production in

districts cormiparatively isolated from other forms of economic activity.

As coffee prices rise, the tendency is for the price of coffee land and

labor to rise also and vice versa. This is possible because coffee land

in these highland areas is not suitable to the Froduction of other comumlercial

crops on any considerable scale and labor is not particularly mobile because

of the isolated nature of many of these areas and the relative lac'k of

alternative employment in them. Ivith lower coffee prices, therefore,

production levels probably would be marintained but the rate of expansion

would likely be small or negligible, since incentives for new planting

would be dulled and the supply of land suitable for coffee is limited.

Africa

Costs of' production are generally much lower in Africa than in

Latin A'rm,erica due to the methods of' production followed and the lower level

of labor costs. A study of East Africa prepored by the Economist Intelligence

Unit in October 1955 takes the followJing view of costs of robusta coffees:

"Even at prices barely economic to Brazilian growers, EastAfrica producers of Robustas should be able to operate on

a remunerative basis. Although official calculations of

costs are based on a level of' L 90 per ton (about 11 cents

per pound), it is doubtful if actual African costs are much

above T 50 (about 6 cents per pound). On the other hand,

prices of Uganda Robustas of fair average quality should

not fall far below T 160 a ton (about 20 cents per pound)

in the next few years . . . . . all

On African mlild coffee the Report has this to say:

"The Arabica coffees should also be fairly well placed, sine

the recent expansion in world production and the further

rises anticipated in the near future have been mainly in the

cheaper types of coffee. There need, therefore, be no fears

of the market being flooded, although of course prices will

be depressed by the overall surplus. Supplies from Kenya

and to a lesser extent Tanganyika will continue to cormand

a premium over other fine quality coffees . . . . ."

- 12 -

"The strength of world demand for quality coffees is expectedto result in a long-term price in the region of T 350 toL, h00 a ton (about 44 to 50 cents per pound) - probablynearer the lower figure. Although this represents a consider-able fall from the current quotations for fine grade EastAfrican coffee, it is still well above estimated costs. Inthe new high-yielding areas where an average of over 6 cwtper acre can be realized, costs are a little over = 150 aton (about 19 cents per pound), so that an adequate margin isprovided for further development.,

The lower prices assumed for the 1960-65 period, therefore, are not likelyto have as depressing effect on production as in Brazil0 1/ In some areasof Africa where coffee production takes on the aspects of a collectioneconomy, lower prices may, however, induce the natives to leave the treesunharvested.

Possibilities of Technological Improvement

Technically, improved methods of coffee production are now knownwhich would reduce considerably costs of production. These include newvarieties of high yielding trees, the application of fertilizer, pestcontrol, better cultivation and the use of supplementary irrigation.According to experiments conducted in Brazil, improved methods could greatlyincrease yields per acre and per tree and reduce costs sharply.

Such methods can be used in many Latin American producing areasby producers who have the necessary capital and technical ability. Ifuniversally adopted, they could increase production sharply on a much smalleracreage than is now being devoted to coffee. It appears probable, however,that siuch improvements will occur only rather slowly0 They are unlikely toexercise any significant effect on overall coffee production before 1965,althou.gh Sp-ifir areas may show marked improvement.

Production and Consunmptionn in 196Q/61 - 196),/6_

After 1960jl therefore, further expansion in output may be expectedin Africa even with the lower prices expected to rule by 1960.

Brazil will probably cease to expand production further now thatthe shnr in^reases in Parana plantings hnS s iaA-h i Some of the olderproducing areas are likely to experience a gradually declining output trend.

4- -- 1 ax 4- o4 o.~4A+1

1/ This differential costu sitiuation is si.mi-L t that in t.h,e cduring the interwar period. Prior to World War I, the location of pro-duction was in t'h-e Caribbean andu in north;ern and western South America.After World War I, however, production expanded rapidly in west Africaas compared witn the- expansion in world consumption. Prices declin.edsharply to a level at which many Latin American producers would notcompete. Consequently, cocoa production bhere stagnated whereas itcontinued to expand in Africa,

This conclusion is predicated on the assuTription that by 1960, the declinein export prices, though only partly reflected in cruzeiro prices becauseof currency adjustment, will have narroued the ir-arg±Jn bet-ween prices andcosts sufficiently to force producers to reduce production in these olderareas.

Miloreover, Brazil is unlikely to expand significantly her riarketsin the future beyond the present level. This follows from the gradlualshift in world consumption in leading consuming countries to ml'ld coffeetypes and the invasion of Brazil's markets for her low quality coffee bythe rapidly expanding supply of African robusta coffees. If, however, theeffect of lower export prices (380 for Santos 4's f.o.b.) and higher interrnalcosts do not produce a sufficient fall in production, the continuing acc-uLmu-lation of surpluses may require nore direct measures to control output, ifa further price decline is to be avoided,

In other Latin Amrerican countries overall increases in outputshould be slow. Except in iIexico, Peru and perhaps Guatemala, readilyaccessible new land is not believed available in sufficient quantity forfurther extensive new planting.

iviiereas world coffee consumlption has over the long terra grownapproximiately 2% per year, and a similar rate is projected until 1960, itis not unreasonable to assum:e that a higher rate, about 3X per year, isfeasible in the 1960's. To acl-ieve such a higher rate of groirth implies,however, a lower relative price for coffee, a greater willingness byconsuming countries to make foreign exchange available for such purposesand a substantial lowering of the price of coffee at the retail level,particularly in Europe, where tariffs and excise duties at high levelsretard consumption growth.

Coffee exporting countries may be able to influence these countriesto reduce such taxes. 4vithin colonial spheres, this might occur as a resultof political pressure arising from the possible existence of surpluses ofrobusta coffees after 1960. Bilateral trade agreements between coffeeexporting and imr,porting countries may be used to increase consumption innon-colonial areas. There is also the possibility tlmt consumption ineastern E;urope and the U.S.S.R. will increase.

The developments in coffee consum,ption outside the U.S.A. arediverse and merit further study, in viewJ of the relative paucity of datapresently available.

Taking account of the estimates made above, the supply-demandposition for coffee in 1960/61-1964/65 may be sumramarized as follows:

-II'-

Estimated Average Anziual Levels of ExportableProduction and Consumption of Coffee in 1960/61-1964/65

(ivillion Bags)

Production Consumption

Brazil 17.0 United States 24.5Other Latin America 15,0 Europe 14.0Africa 9.5 All other 3.5All other 1.5

Total 4300 Total )42.O

These estimates of production have been made under the assumptionof normal weather conditions with the exception of one severe frost inBrazil. In the year following a frost, the Brazilian crop could fall to12 to 14 million bags, and even under poor weather conditions, excludingfrost, the Brazilian crop in any one year could be reduced to under 15 millionbags. Gn the otlRer hand, good weather conditions could increase it to over21 million bagssassuming at the time that Parana was not recovering fromthe effects of a frost.

For the world as a whole, changes in weather conditions frominormal could cause a variation in exportable production rom 32 to 50 millionbags in any one year.

From the ccnsumpticn standpoint, it has been asswned that withrespect to consumer tastes, there will be no radical changes over thle nextdecade. One radical change would be thle irprovement of soluble coffee tothe point where in flavor and aromia it would be similar to regular coffee.If this happened, the demand for green coffee could shrirnk considerably.This could create a sizeable slurplus probl em, and necessitate extraordinarymeasures to rehabilitate the industry.

Aside from these qualifications, which canLnot presently beaccorded great weight, the estDiiated supply-demand position, ii- borne outby events, would imply that a closer balance is in prospect after 1960 thanin the immediately preceding years. It mnay therefore be concluded, againassuming the accurac.-y of the estirates, that no appreciable decline i-n coffeeprices below 400 (Santos 4's) is lilcely in 1960-64 period. This conclusionimplies that the general level of world prices remains at about presentlevels; marked changes in either direction imply roughly similar adjustmentsfor the estimated price of coBfee.

Limitations of the Estimates

The close reader will have noted that the estimates for 1957-60and for 1960-64 are heavily dependent on certain assumptions. The actualcourse of coffee markets may well differ frorm, those set forth abovePresently foreseeable causes of variation may be summiarized as follows:

I/ Tn the 1955-5 season registrationsj aft.er diiciting internal consumprtionat ports, totalled about 21 million bags.

- 15 -

1. Production may, of course, vary substantially from estiTrates.Variations in individual years could ease or increase theburden of price-supporting activities in Brazil and else-where in short periods.

2. The likeli-hood that average production over a 3 or 5 yearperiod will be appreciably greater than estimated is believedssmall, although there are markedly higher estinates ofaverage production, notably those of the U.S. Departidentof Agriculture0 The assumed moderation of output growthIr 1960-64 is dependent on price reductions irn the late1950's. I-f coffee prices do not decline in the late 50's,production in Brazil is likely to be higher than estinatedand the stimulus to new plantings elsewhere may result infurther increases in output in other areas by the mid-60's.

3,, 1;orld dei,arnd may not increase as rapidly as postulcted fora number of' reasons: a) maintenance of prices at above 400(Santos lt's) for a considerable period would likely reducedemand in 1960-64 belowz tie level estimated above; b)limited exchanr;e availabilities and taxation policies inEurope might retard the rate of groilth of consumpticn;c) radical changes in consumption habits might adverselya'ffect dermiand, although there is no present basis forprojecting such changes. On the otheer hand, per capitaconsumption in Europe, particularly in Eastern Europe, isbelow pre-war levels, vihich leaves scope for rapid growthin consumption umder 2avorable circumstances.

In conclusion, it is evident that attempts to maintain coffeeprices at 500 or higher (Santos 4's) befond 1958-59 are likely to requirean increasing outlay for price-supporting activities and to encourage anincrease in plantinEs and producticn. No single producing area could longcontinue to withhold surnluses of 10% or more of world output WJithoutseriously reducing her relative share of world exports. An agreement betweenproducing countries would, it is true, distribute more widely the burden offinancing such surpluses to be withheld from the market. however, to befully effective, such an agreemient over an extended period implies far moreextensive production and trade controls than presentlv appear liklelr. Andlying beyond producer control, are the vagaries of consumer taste, techno-logical developments in the preparation of coffee and coffee substitutes inimporting countries; foreign exchange and tax policies in consuming countrieswhich could markedly affect consumpticn also lie outside the control ofproducers.

A-1

APPENsDIX I

FOurIV2Trw R i * x±TES OF -w0ULD t -J.iUlfAtbtL; ritUDUrCTIN l957-l959

A. Total Production

This Appendix contains estir,mates of the average levels of productionovr- the- --re a per,v, 1 - C0 1/ I - ,r -s- .3 iriT

the main body of the text. Reasons have been given in Appendix II for thedifferences bet--een the estinmatUe nade here and those made in;dependertl-y byE.C.L.A., the U.S. Department of Agriculture and the Sub-Committee of theSpecial Comivission oIL Coffee of the Inter-Arherican Economic and soc'al Council.

The estin-ates assume a contin-uation of coffee price levels prevail-ing in the 1950-53 period, i.e., in the 50 to 60 cenit level for Santos htsat New York, with appropriate differentials for mild and robusta coffees.Average wieather conditions are also assumed, although the effect of the 1955frost on production in Brazii is taken into consideration.

It is expected that present methods of procuction will continue.Njew varieties of coffee trees are capable of increasing significantly coffeeyields per tree. Better methods of cultivation includiing the supply ofsupplementary water, the use of fertilizer and insectic-fdes have also beendeveloped. Such innovaticns, if genera ly adopted, could increase outputconsiderably above present levels on a smaller acreage than is now devotedto coffee. Tt is unlikely., howsever, that such methods will be adopted ona sufficient scale to affect appreciably the level of world producticnbefore 1960 or indeed within the next ten years.

Coffee prices have been high compared with average costs ofproduction since 19h9. W.jorld capacity to produce coffee in terms of producingtrees has increased considerably during this six-year period. The supplyavailable for export, therefore, is expected to increase, but the rate ofexpansion will vary as between different coffee producing areas. Hence eachmajor producing county- and area must be considered separately.

It should be noted that lack of information as to the number oftrees in production, their ages and yields and the rate of new plantingrelative to the retirement of old trees makes any such estimates subject toa considerable margin of error,

1. Brazil

Production data in Brazil relate to coffee registered withthe Government for transport to the ports from the interior producing areas(see Table 3). Thus it represents exportable surpluses plus what is consumedin the non-producing areas of Brazil, conmonly referred to as "port consumptionand coastwise shipments."

1/ Strictly the three marketing seasons 1957-58 through 1959-60.

A-2

In Brazil, coffee is a migratory industry and the production methodsfollowed progressively exhaust the soil. The land. ls gLadually convetLedto other uses when the trees grow old and yields decline. New coffee fazendas

are then established on virgin soil in new areas. Thle state of iao T)d-aulo

developed in this way in the 19201s. Now the coffee frontier has advancedto the wTestern part of Sao Paulo and to the neighboring state of Parana.Increases in production will come chiefly from these two areas over the nextten years,

Sao Paulo, the largest producing state, has long don,inated Brazilianproduction, The huge surpluses of the 1930's occurred here. Widespread

abandonment of plantations in the older producing areas of the state followedthe subsequent decline in orices a-nd production fell sharply. New plantingin the western part of the state in recent years has reversed this trend,Production is likely to remain at this higher level as long as prices aresufficiently remunerative to maintain production in the older, high costsections of the state. Production is expected to remain at an average levelof 8.5 rmiillion bags in 1957-59. This compares with 7 million in the 1950-54period (see table on following page).

There exist unused areas of sufficient size to permit an expansion

in production in the states of ilinas Gerai.s, Espiritu Santo and Goyaz. innone of these areas, however, does the present rate of development indicategreatly increased production in the near future.

The main area of expansion at present is the state of Parana.Production has been increasing over the past fifteen years. The presentpotential in terms of trees planted and producing at normal yields has beenvariously estimated at from 6 to 10 millio,n bags. The variation representsdifferences of opinion, in the ab:asence of good statistics, of the number ofmature trees and their average yields. The estimate used here is 6 millionbags. This makes allowance for the reduction in production expected as a

result of' frost.

Other producing states in Brazil are relatively unimportant as

compared with the main producing states of Sao Paulo, Parana, IMIinas Geraisand EsDiritu Santo. Production in most of these other states has beendeclining over the past 25 years. No further expansion is expected at thistimie on any considerable scale.

An annual average estimate of exportable production by states for19571/58-1959/60 is shown in the table below, assuming no further frostsduring the neriod. Data for preceding periods are appended for comparative

purposes.

A-3

Estimated Exportable Production in Brazil by States1957 - 19597r4Vllion Bags)

ArnualAverage 1950/51-19$h/55 1935/36-1939/4o

Sao Paulo 8M6 7.0 15.0Parana 6,o 3.3 0.8

M4inas Gerais, EspirituSanto and other states 5.9 5,2 7^0

Total Registered 20.5 15.5 22.5

Port and Coast Consumptionplus Growth of TotalDomesticG Consumnti-on 1.0

Exportable 19.5

Total registered exportable production must be adjusted for port

and coastwise c nsnLmption in Brazil. The allowance is 1.0 million bags for

1957-59 as compared with 0. rmillion at present, leaving an exportableproduction of 1Q95 million bags.

Perilodic frosts and droug-ht cause considerable variation in

production fromr year to year. Frost is common to both Sao Paulo and Parana

but more so in the latter. Ln 1955, a severe frost was experienced inParana which will affect production in '956/57 and 1957/58 adversely.

In 1956-57, Lor instance e-Ynortable production may fall

below 14 million bags. Alternatively,production could rise to 25 millionbargs in years of very good weather.

The volume of extorts is the most re i able statistical base forestimiates of future exportable production for Colombia and all othercountries except Brazil. The estimates given below are based upon an extra-polation of export trends as modified by knowqledge of conditions in each

countiLry,

L. ColombiLa

Coo -,;bia!s exportable prodtor4".+- hasq ep-VnMnrInr -re>rmirl L up

to 1950. In 1950-52 this increase abruptly ceased largely due to adverse

weather, b-ut was res-uLmed -I 1953-5h * The amotunt of new land available for

expansion is limited and, althcugh some future increases in production areexpected, the rate of increase -will decline. Exports are estimted to rise

to 6.5 million bags in 1957-59, which compares with 6.2 in 1955-56.

A-4

3. Other Latin America

The main exporters are El Salvador, Guatemala, Mexico,Nicaragua and Costa Rica in Central hAmerica, Haiti and Sa, Domingo in the

Caribbean and Venezuela and Ecuador in South America. These countries will

be exammined in two groups.

(i) Central Amlerica - This group produces the finest milrd

coffee. Exportable production in Central America averaged 3.8 million bags

in 1950-54, and exceeded 4.5 million bags in 19'5$. Production un mostt regions

is expanding but the degree is retarded in most countries by the scarcityof suitable land and, to a lesser extent, labor. The main increase is expected

in Mexico where new land is available. Future levels of exports are forecast

as follows:

Estimated Annual Eixportable Production inCentral America(,idllion Bags)

Annual Average For1950-54 1957/58-1959/60

El Salvador 1.13 1.3Guatemala 0.98 1.1Mexico 0.91 1.5

Costa Rica 0.36 0.5Nicaragua 0.30 0.4Honduras 0.15 0.2

Total 3.83 5.0

(ii) Caribbean and South America - In 1950-54, the restof Latin America exsorted on the average about 1.7 million bags per -ear,

with the total exceeding 1.9 million bags in three of the four years ending

1955. The level of production in Haiti, the Dominican Republic and Ecuador

should rise substantially although the two former countries are subject to

hurricane damage. These plus minor producing countries should export 2.1

million bags in 1957-59.

All Latin American countries except Brazil and Colombia, therefore,

should have available for export an average of 7.1 million bags in 1957-59.

4. Africa

African production has shown the greatest rate of increase

of all major producing areas in the past thirty years. In 1925-29 exports

averaged 0.8 million bags; by 1950-ih, this had increased to over 5 millionbags,

A-5

Production is expanding rapidly in all major producing areas withthe exception of the Belgian Corgo. iFench Africa (FrencOLh West Africa,Equatorial Africa, Cameroons and Iadagascar) production has expanded mostrapidly.

For the continent as a whole, exportable proucuwCt i a been

increasing at a rate approximating ten percent per annum. Exportable production

is expected to reach approximately 7.9 .million bags in 1957-59.

E'xpected production by major regions and countries is as follows:

Estimated Annual Exportable Production in Africa(i4illion Ba-s - Five-year Averages)

1950-54 1955 1957-59

French Africa 2.03 2.67 3.1British East Africa 1.16 1.87 1.7Angola 0.89 0.92 1.3Belgian Congo 0.56 0.70 0.6Ethiopia 0.44 0.60 0.7Other 0.13 0.17 L_5

Total 5.21 6.93 7.9

5. Asia

Coffee production in Asia is largely restricted to Indonesia.

Output in this country is relatively low as comp2red with pre-war but asharp expansion may be expected in future. Other producing areas are ofminor importance as exporters. For all Asia an exportable production of

1.0 million bags is expected in this period.

6. World Exportable Production

The total picture for exportable production in 1957-59 has

been assembled in the table below.

A-6

Estimated Average Innual tIorld Exportable ProductionFor 1957-i959 V/

(1Nillion Bags - Annual Averages)

Brazil 19.5Colombia 6Other Latin America 7.1Africa 7.9Asia loO

Total 42,0

a Strictly these estimates comprise thethree crop years beginning with 1957-58and ending with 1959-60.

/ Represents the mid-point of a wide rangedepending on weather conditions.

In 1957-59 world exportable production will be held down to 42.0 millionbags because of the effects of the 1955 frost in Brazil. If, however, further

frosts occur, the estimates would have to be reduced.

B. Production by Types

It may be misleading to examine the coffee situation solely in

terms of total prodtuction as has been done in the preceding section, as thisdoes not recognize the existence of the different t3pes of coffee and theirdiffering patterns of production.

Two varieties of coffee are dominant in world trade. These arearabica and robusta. The former is thle most important. It may be subdividedinto (1) Brazilian coffee, which consists of two general types, soft (Santos)

and hard (Rio) coffees, and (2) t'mild" coffee, or all arabica coffee grownoutside Brazil. The most important sources of mild coffee production,particularly of the better qualities, are Colombia and Central America. PIost

of the robustas are Droduced in Africa and Asia although some of these

countries produce good mild coffees.

Small quantities of robustas are also produced in Latin America.Average prices renresentative of these different types are given in the

table below.

A-7

Snot Coffee Prices orn the liew York harket.~

(Cents per- co-Lrdj

Average Average July1930-39 1950-53 1954 1955 1956

Brazils

Soft (Santos 4's) 9.7 5)4.1 78.7 57.1 59.2Soft (Parana 4's) 'iA. 54O5 2/ 77. 7 55.0 54 2

Hard (Rio 7ts) 7.3 45.8 61.7 42.2 44v8

11ilds

High quality (Manizales) 12.0 57.2 80.0 64.6 78.0Medium quality (Haiti) 10.2 52.3 75.9 59. 2 69.9

(Ecuador) 7.9 47.5 63,0 47.8 50.0

Robustas

Good quality Angola N.A. 46.1 63.0 45.2 40.7Medium quality (Br. East

Africa) N.A. 46.2 57.9 38.4 34.1

a/ 1951-53 average - equivalent Santos 4 price 55.40.

The most representative coffee is the soft Brazilian Santos ty-pe represented

by Santos 4's/. HIigh quality milds usually command a prermLium over Santos 4's

of 2 to 5¢0.zLMedium quality milds range above and below Santos 4's dependingon the quality of the individual type. Robustas are the cheapest and lowestpriced coffee. Hard Brazilian coffees are priced at about the same level

as the best robustas.

The table below shows the expected increases in production in 1957-59broken dovm by type of production.

Estimated Annual Average liForld Exportable ProductionBy Types of Coffee 1957-1959

(dillion Bags)

Total Brazils Miilds Robustas

Brazil 19.5 19.5 -

Colombia 6.5 - 6.5 .Other Latin America 7.1 - 7,1 _Africa 7.9 - 12 6,7Asia 1.0 - 0.2 o.8

Total 42.0 19.5 15.0 7,5

I/ Present larger premia reflect the current shortage of milds due to a badcrop in 1955-56. These premia are likely to decline in the coming season.

Information by type is not collected by the specialized agencieswhich gather coffee statistics0 Hence there is no exact hlstorical basisagainst which to compare these projections. The reader should also noticethat there are subdivisions within tlese general groups. There are hardand soft Brazils, washed and sun-dried rmilds and different qualities ofrosbustasc Thiese are mportantv wheLn the -various import markets for coffeeJ. Ju..- IL ±IL p LZIU I1 . JM

are considered because there are distinct patterns of trade by type andy grales within types.

It appears inad-visable, however, to attempt a detailed analysisof coffee types and markets, until more systematic collection of such datais unwdertakeen on a regular basis.

B-1

APPENDIX II

DIFiERENCE IN ORVJA*rd' ESTrIIATES Or CO uMADE BY flDEPFITDaT STUDIES

Independent estimates of future coffee production levels show awide variation in results. This is due to the various methods used and the

assumptions that are made to supplement inadequate data. Recently two suchestimates have been made, one by the U,S. Department of Agriculture andthe other by the staff of the Suib-Committee of the Special Co'mission On

Coffee of the Inter-American and Social Council. Both are given in therestricted report of the Sub-Corrmittee dated December 29, 1955, and publishedby the Pan American Union.

The results of these two studies along with the estimates used

in the main body of this report as deterrrined in Appendix I are summarizedbelow. The estimates represent the average of the two years 1958-59 and1959-60.

Three Estimates of l orld Coffee Exportable ProductionAverage for the Two Years 1958-1959 and 1959-1960

(Million Bags)

This report 42.0Staff of the Sub-Committee 47.8U.S. Dept. of Agriculture 51.3

There is a difference of almost ten million bags between the upper and lowerestimates.

Sub-Com,lmittee M'ethod

The staff of the Sub-Coimmittee used the method of rmultiplecorrelation analysis as applied to historical data. Production was correlatedwith coffee prices lagged four to six years; an allowance for long-term growth

ias also made. The results attained were that in the past, a 10-cent increasein the real price of coffee has resulted in a rise in exportable productionof 4.5 to 5.0 million bags five years later. On the other hand, a 10-centdecline in coffee prices produces a reduction in production of only 1.0million bags.

The study also found that the standard error of the forecast wasabout 5.0 million bags. This means that the 1958-59 and 1959-60 averageestimate of 47,8 million bags is only the raid-point of a range, Statistically,the chances are four out of five that the actual coffee production willfall within five million bags of 47.8 million, i.e., a range of from 42.8to 52.8 mi111ion bags.

B-2

A major objectionto this method is that the effect of past price

changes on production will not necessarily be duplicated ir the future.

Tn the analysis of prospective Brazilian production (Appenaix I) 7it was

pointed out that the availability of suitable land, transportation facilities,

lahor and canital for developing new plantation or rehabilitating old ones

differs as between countries. The likelihood of future production increases

Parallellinr those in Brazil in 1925-35 as a consequence of high prices after

1923, is believed to be veryr small in viewi of the limited new areas available

for planting in Rrazil- This is also true for most of the rest of Latin

America, but is more applicable to Africa,

It is felt that such a mechanical approach to the estimation of

probable output levels reflec-HIng a rise in real prices for coffee is less

likely to be accurate than an appraisal of the prospects for each of the

TT cQ Th A ( ~ lU. LJJ.&1*. poc

The method used by the UTS, Department of Agriculture is to analyze

the number of producing trees, new plantings, abandonment of old trees and

the -yields by tree age groups for each prndAutbing country and to calculate

future producing areas. The estimates for 1958-59 and 1959-60 made by the

Depart,,ient and the ones used here are as follows:

L) tIrE,s of ;,`,or1d Coffee ¢vnorta+ble Production

Average for the Years 1958-1959 and 1959-1960

COvherBrazil Countries Total

This RLeport 19.5 22,5 42.0U.S. Dept. of Agriculture 28,3 23.0 51.3

The diLference lies mainly -xinfe Brazilian estmat-e. M ost obervers do

not believe that the increase in production in other producing states besides

Parana will reach the levels est±il-t' 'oy the Uu. u

It is relevant to note that U.S.D.A. forecast coincides with the peak single

year productions reached in the period 1929-33. The highest average level

reached for a 2-year period was less than 25 million bags.

The method of analysis by tree numbers is logically sound. Houever,

the accuracy of the available data is insufficient to support the analysis,

in the opinion of many observers. A selection of comments is given below.

The Sub-Committee of the Special Comriission on coffee apparently

rejected this method in favor of the multiple correlation techniquue. It stated:

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"In the past an appraisal of the future of coffee has consistedof three steps: i) a study of thle number of trees, newplantings, average yields and acreage designed to provide anestiriate of fut-re output; , .a . a

not the only) weakness of this approach lies in the first,falter-lng step Unflortuiately-, data on nubrier of trees, newplantings, average yields, etc., are seriously incomplete.Even in the sections of Brazil for which figures are mostabundant, they are inadequate or contradictory, and in othercountries they are almost entirelY iacking8 XViith the materialpresently at hand, or likely to be available in the monthsahead, estimates on this basis of the future world productionof coffee must remain in the category of opinion. Each man -or Bureau - has a right to his own."1

Several U0S. Agricultural Attaches have expressed similar viewsconcerning Brazil, One who spent several years in Brazil and who visitedmost producing states there in order to gather material for a report states:±f

"Because of the obvious inaccuracies in the available statisticsany conclusions drawn with respect to recent and probable futuretrends in number of bearing trees, new plantings, and abandon-ment are likely to be subject to wide margin of error. Thestatistics for young trees are believed to be particularlyunreliable."

" . . . . it has been necessary to rely heavily on impressionsgained through personal observation and on assumed rates ofabandonment based on the average producing life of trees,because of the general inadequacy of the available statistics."

"It is the writer's opinion , . . . that estimates can be

made which, although little better than guesses, approximatethe truth more closely than do the statistics from officialsources."

V. D. Wickizer in "Coffee, Tea and Cocoa", published in April 1951,makes the following observations on the world coffee industry under theheadinR: "Statistical Information vs. Producer Propaganda":

"Many of the important uncertainties in the coffee outlookare traceable directly to the wholly inadequate factual baseof the industry. This long-standing weakness clouds appraisalsof particular events, and leaves an open field for rumor andpropaganda. Very little imnprovement has been shown in thissituation during the recent evolution of the world coffeeeconomy."

2/ Foreign Service Despatch January 30, 1951

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A revealing example is shown by the statistics released by thePan American Cofiee Bureau shortly after the 1953 frost. These data w,ereobtained from the I,inistry of Agriclulture of Brazil and the BrazilianCoffee Institute. They pertain to acreage arid tree nuW,bers in the stateof Parana for 1952 and 1953.

1952 1953

Area of bearing coffee (000 ha.) 332 332Number of bearing trees (millions) I 301 533

Iti t it "" II 845

A great increase in the number of trees is shown between 1952 and1953 on what is purported to be a stable acreage of bearing trees. Moreover,the reader is given a choice between 533 million and 845 million dependingon the particular table used,

kioreover, it was not dif'ficult to obtain varying estimates fromother sources at the time to add to the confusion, Figures published bythe Department of Agriculture of the State of Parana showed a total of 683million trees of which 239 million are over four years old i.e., in bearing.J. Testa, Superintendencia do Cafe, Sao Paulo, however, estimated 280million trees were in production prior to the 1953 frost. There were at thattime at least four estimates of bearing trees in Parana: 239, 280, 533 and845 million.

The situation as regards producing states in Brazil other thanParana and Sao Paulo is described by the Federal Trade Coyanission's "EconomicReport of the Investigation of Coffee Prices" published July 30, 1954:

"But here the estimates are in complete disagreement, asituation which is not to be unexpected in view of therelatively small size of the farms and the immense size ofthe area". i/

This report also commented upon the situation in other (non-Brazilian) producing countries:

t'For a number of countries, data on the rate of increase ofnew plantings were not available. In such cases the forecastshad to be based upon other. and usually more fragmentary,types of information." i/

/ Page 512-9/ Pa 515C

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The staff of the Sub-Committee of the Inter-American Economic andSocia-l Councij. in apprain the av a lablity of basic data in co.wntriez

other than Brazil stated "they are entirely lacking".

Hence, neither of the two methods described here were adopted. Themet'hod in Appendix I has been to base projections from. reCent levels onopinions received from planters, exporters, importers, roasters and officialsol various trade organizations who have knowledge of conditions in particularcountries. lHembers of the staff of the Bank with special knowledge were alsoconsulted.

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APPENDIX III

FORMWAIW E;TrIAT;S OF WUOR.LD CONuSIUTLPrTIONIN IMPORTING COUNTRIES, 1957-i959

1. TOTAL COUUSH('PKP-T'Di

This Appendix provides the analysis showing how estimates of thefuture levels of cons7umption were derived. It supplements Section III inthe main body of the text.

These estirnates asstume a continuation of high levels of businessactivity, continuing economic development and coffee price levels equivalentto the 1950-5h period i.e., in the 50-60 cent level for Santos lOs at NewYork with appropriate differentials for rild and robusta coifees.

A discussion of the effect of lower prices m consumption is givenin the main body of the report. Here the important casual factors which areconsidered are increasing population, increasing real incoimes, changes inthe pattern of consumption by type, the grow^th of soluble coffee consumptionand the influence of expanding colorial production on consumption in themetropolitan areas.

Annual world coffee consumption has been relatively steady ascompared with production except in periods of war and very sharp coffeeprice changes. The market has epanded over the long-run. Amnual consumptionin all importing countries averaRed about 18 million bags lust prior to WorldWar I. This rose to aboi t 31.6 million bags in 1950-54, reaching 33.8million bags in 1955_

The United States and Europe absorb 61 and 30% respectivelv oftotal imports or 91J, of total world trade. This appraisal thereforeconcentrates larrelv on these two narkets.

A. The United States Market

The United States iarket has expanded from about 7 mnillion bagsprior to World liar I to about 20 million bags at present (see Table 1).The exnansion is expected to continue alonp with innrtssps in populationand real incomes.

Estimates of future levels of consumption and imports are basedo7n the ex+rapolation of trends in per capita consumption and >opulation.Per capita apparent consumption has increased from an annual average of 9.2pounnds in 1910-1) I to 18 1 pounnds in I9h549. This la+ter nigure, however,reflects relatively low coffee prices and includes the period of post-warrestocking of wo+hole1sale ar.d Iretail pip+l- e T n +of tl;is resocin

being unknown, it cannot be removed fromii the estimate. Actual per capitacons 4 ron, therefoe4- is 4lCe to beC 4 'I than 4his Th.4 , e_ J.J± V±L.l n~n~ *.&F ' uvJ _o oo. vv±±a u % U U.L.J C ullai UllL .LO 11

7-77,I Consumbption in this case ls definea as equai to imports into consuming

countries. Ideally, account should be taken of changes in stocks intnese countries, but only partial data are available.

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1950-54 average dropped to 16 polmds, partly because of a cessation in therestocking movement b-ut' also as a result of the increase ln coffee pricesto the 50-60 cent level.

There was temporaryr decline to 14.7 pounds in 1954 when pricesrose to an annual average of 79 cents per po-ud and stocks were drawn down1.The 1955 average has been estimated at 15.3 pounds, reflectirg somerestocking and the return of coffee prices to the 50-60 cert level.

The figure o- 16 pounds/taken as a base point from which to estimatefuture levels. Since 1910 per capita consumption has increased at the rateof one pound in each five-year period. ITf this rate of inicrease is appliedto an average of 16 pounds for 1950-5)4, then the estimated average for 1957-59would be 17.2 pounds.

The table below shows the estimated level of U.S. consumption based

on this per capita estimate.

Estimated United States Average Annual Consumption(h4illion Bags)

1950-54 1957-59(Actual)

Civilian population (millions) 156 169.2Per capita consumption (pounds) 16.0 17.2Total Civilian Consumption (million bags) 18.8 22.0Military requirements (million bags) o,6 0,5

Total 19.4 22.5

Adjustment for greater use of soluble coffee 0.5

Total Imports 19.4 22.0

An alternative method of determining future levels of per capitaconsumption is to examine the relationship between consumption and changesin real incomes. This has been done by F.A.0. for 1975 using the datacontained in the Paley Report of June 1952, a calculated income elasticityof demand of about 0.55 and a real coffee price at the retail level equiva-lent to the 1950-53 average (in terms of green coffee this was 57.20 - see

Table 5).

-Although it is not possible to predict how much coffee willbe consumed in 1975, we can. on the other hand, estimate howmuch coffee might be demanded if its real price in 1975rem ai ned, for example at its 1950-53 average. Applying theseassumed data in our equation, the probable per ca;pitaconsulmption in 1975 is about 9:3 kilograms (20.5 Dounds).This projection would represent an increase of about 15$ inper capita consumption over the nex-t l-20 years."

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This increase averages 0.176 pounds per annum and for 1957-59would work out at 17.4 pounds of green coffee. This is fairly close to theestimate given in the table above, This estimate does not, however, allowfor the effect of increasing consumption of soluble coffee.

Other independent estinates of United States imports (which canbe taken to represent consumption) have been collected in the ECLh report.These are shiow-n in the table below for various years:

Some Independent Estzimates of United States Coffee Imports(Mtillion Bags)

YearEstixiate Y e a r

Estimator Iiade 1959 1960 1965 1975

Rederacion Nacional deCafeteros de Colombia 1954 22

Federal Trade Commiiission 1°054 Under 20 /

U.S. Dept. of Agriculture 1954 28.7

E.C.L.A. 1955 23.5- 26.4.24.3 b/ 27.36 b/

This Report 1956 22.1 c/

a/ Based on very high price assumptions.i Based on prices for Manizales coffee at 60¢ and 50¢.e/ Crop year 19q5-60.

The FELT,A estirntes for 196o of 23.5 to 243 million bags made explicitlyat prices of 600 and 50¢ respectively may be appropriately conpared withthe estimate in this st+.udy for 19Q59-6 of' 22.1 million bags if an allowanceis made of 0.5 million bags for the effect on imports of the greater useof soluble coffee. This woulld raise the estiTnate of this report to 22.6million bags.

The net/of increased use of soluble coffee on green coffeeconsu-mption is a moot one. It is waell recognized that on a cup basis- morecups of coffee can be prepared from a given quantity of green coffee whichis used to produce soluble coffee rather than regul-ar coffee. On theother hand, the ease of preparing instant coffee as compared with regularcoffee is said t o +ir. n rreas the ryr. n onf o-f fee i-n tens of the numb er

of cups. This may tend to increase the consumption of green coffee. Thequesio is whau is t-he lnet e-f-et of the two tendencies'?qus4o 4 s. wl,A.4 4 L. 4-1,, -,,+ +-vf 01,c th T.

T1 our view, thule net Cfec4 -1 be a small reduction in greencoffee use, and a very minor increase in the numiber of cups consumed. Thisvie-w is reflected in the net reduction in green coffee imrports of slILhtlymore than 2% from the unadjusted trend figure. Roastings for soluble coffeeswere 15.2% in the first half of 1956, as compared to 12% in 1954-55, possiblyreflecting the wider price spread between high grade coffees and those usedfor the soluble product.

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B. The European IMIarket

Coffee consumption per capita in Europe is smaller than in theUL." due t'Uo lower incomae levels, %tIle use o,f' s,ubstitues and --tndr- -1suchas chicory and the higher retail prices caused by the imposition of importand excise ,axes,

The raue of increase Jun population 1h1-as al1so been loer h ni

the United States. Thus, the expansion in the volume of coffee consumptionhas lagged behind the united States. n 1909-1913, aULual cons-unptionaveraged slightly under ten million bags and approached 11.5 million bagsin 1935-39. Despite sharp increases in recent years, fro.m 84 minllion bagsin 1950 to 115 million bags in 1955, per capita consumption is still belowpre -warO

iTo studies,to our k.nowledge, have been made of the relation ofcoffee consumption to income changes for European countries. Net importdata are generally used in the absence of information on stock changes;such changes would, .in/particular year, overshadow income changes and producenonsensical results if mechanically applied.

Wartime disruptions preclude the simple projection of historicaldata for purposes of estimating future trends. Hence, the method used forthe United States market canmot be used here. The method used has been tocalculate probable consumption on the basis of some further increase overpresent per capita levels (2% per year) and allowance for population groith(1% per year), but not for any appreciable future changes in imports andexcise taxes in the 1957-59 period.

European annual consuwption is estimated to average 12.5 millionbags in 1957-59 as cornpared with an 11 million bag average for 1954-55.

C. All Other Countries

The world coffee market outside the United States and Europe islargely confined to Canada, the Argentine, Soutlh Africa, French West Africaand the Middle East. Total consumption at present averages 2.7 millionbags per annum. This is expected to increase to 3.0 million in 1955-59and 3.2 million bags in 1960-64.

The estimates for the three main segments of the coffee importmarket are assembled together in the table below.

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Average Annual World Coffee ConsumptionT_ 1 Or_1 OEI), mn Pc+A-rnm+ rcz fr'm 1 07-1 QIOQ n /

(;Aillion Bags)

1950-54 1957-59

United States 19.4 22.0EZuope 9.5 12.5All Cther 22.7 3.0

Total 31,6 37.5

ai Strictly these estimates comprise thethree crop years beginning with 1957-58and ending with 1959-60.

Total w,orld consumption of 37.5 million bags for ,957_59 representsan increase of 6 million bags over 1950-5t1 levels or 19%. _ This increaseis high as compared with the long-term trend in world consumption of about2% per year. It rofiects continued full employment and Increasing real incomllesin the major coffee consuming and importing countries.

II. CONSUEPTION BY TYPE

The pattern of world trade and consumption of coffee by types hasundergone considerable changes over the long-term. This is shomn by thechanges in export trade. In 1909-1913, Brazil accounted for 70, of totalworld exports. By 1924-28, her percentage had dropped to 61. In 1934-38,the percentage fell to 54 and 1950-54 to 47.

A. Changing Patterns on the United States ifarket

The percentage share of Brazilian coffee in U,b. imports has beendeclining at the rate of 8.5% every five years or 1.7% per annum,On the other hand, imports of mild coffees frofim Colombia, other LatinAmerican countries and Africa have been increasing steadily at a rate ofabout 13% every five years (2.6%/ per annum). Over half of the im.ports from

Africa have been of the mild types. The proportion ol mild coffees in U.S.consumption, therefore, is likely to increase in the future. On the otherhand, the market for robustas is not expected to beco:me significantly largeand will probably taper off as the rLarket for solubles becomes satulrated,probably in the 1960's.

/ The 1955 Coffee Annual of the George Gordon Paton Co. contains quanti-

tative estimates of the levels of world coffee consumption expected in1960. These were made by six officials connected with the coffee industryas an importer. exporter, roaster or government official. The averageof the six estimates is 38.1 million bags and tne range is 34h8 to 40.6riillion The estimates of this report, when adjusted to 1960 would beover 39 million bags.

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qtimatpes sf future trends in the pattern of United States importsand consumption by types of coffee are shoin below.

Estimated Composition of United States Coffeempnnrt. bhv Tvre 19g7-1959

QuantityPercent (approxi mnt.)Of Total in 4iillion Bags

Brazils 44 9.7

Robustas 6 1.3

Total 100 22,0

r~~~~~~I n l___ _._ nrXpear_ 1AA l,11-rk i

B. Chanigirng Patterns -on the Euoenhre

…o --- -l1mo- coffee tha4-- th

United States. Approximately _4% of total imports came from Brazil, 14/Ofrom other Latin America,3% fromIr A2rica and 8l fromL all other areas includigre-exporting countries. The situation varies, however, country by country,West Germany- and Switzeriand cons-uCe the good quallty coffees, both Santosand milds. Scandanavia consumes good quality Santos coffees but relativelylittle of the other types. The united Kilgdom draws u most of its suppliesfrom British East Africa and France from French lest Africa. AIost of theremaining French imports come from Brazil.

Earope tookc a larger volume of mild coffees pre-war than at presentand a much smaller volume of African coffee. In future the trend is likelyto be towards more milds (especially in Germany) and rrmore iob-ustas. TheRobusta market may expand due to cheapness and because the colonial areaswill probably enjoy a preference on the British, French and Belgian miarkets.

APPETDIX IV

C0312XTTS ON DHELO ELhSTICITIES

Two estimates of demand elasticities in the U.S.A. have beenpublished and the results are noted below.

Price IncorneElasticitv Elasticitv

Federal Trade Commission -0.5 0.2F.A.0. -0.2-03 0.54-0.56

The I.iM.F. has attempted to estimate price elasticity of demandon a world-wide basis and has arrived at a ran,ge of -0.2 to -0,3. the latterbased on the use of the F.T.C. figure for the U.S.A.

The data used for U.S.A. are for consumption after allowing for

chlanges in stocks at the roaster and imnorter level, but make no allowancefor changes in stocks at wholesale and retail levels. For Europe, thestoclr data are even less satisfactory=

In particllar vreer3 stock nhnnoes reflecting an adaptation toprobable price changes may be so large as to more than offset the effectsof changes in prices or incomes,

Over a long period, hoever, i+ s eonabl to predicate ananalysis on the basis of a response in demand to price clanges of between1/5 and 1/30 Even this is a relatively rTide .margin of error as indicatedby the following example.

Let us assume a prevailing price of about 55¢ per lb. and a fore-seeable world surplus of exportale ProdJcticn of 10%o above expected de-mandbased on the 550 price. If the mparket is to be fully cleared, i.e., nochange in stocks for the period, the price wo ld have to decline 30 to 5n%

Furt-her, if the situation were construed to be tporay, that isto say, that in the following period the exportable surplus might decline,any such large price drop in a single year would create a demand by roasters,importers and perhaps others for stock accumulation. Similarly, largeproduc-ig countries mLigsht wit,hLold supplies, as has been done n Brazil and

Colombia on rnany occasions. Thus, the withholding of 5% of world suppliesfor a single year ndight reduce the anticipated price decline to slightly overhalf that indicated above. This would in turn reduce the incentive toaccumulate stocks in importing ccurutries.

The foregoing illustration indicates the liLitations of the useof the price elasticity. concept in any analysis of short-ternm movements.

Over the longer-term. the concept is less ambiguous and may beused to indicate the probable order of magnitude of' changes in consumptiondue to a manor sustained change in price relative to other coruiodities.In this report, it has been used to the extent of anticipating that a dropin real prices wouild be accomnanied by an increase in consumption of about1/4 the percentage drop in prices assumed.

F_I

A PDTtIrrTY V

THE EFFECT OF COMPETITIVE CONDITIONSON THE TV."TOT CT ;F>J r. i 7.Q KIT

The competitive situation would result in a quick and severe fallin prices beca-use of tuhe inelastic rate of su3pply j Aii A of .jl for

coffee. Chart 2 illustrates annual average variations in real coffee pricessince 1913 as related to s-rplus prod-uction. High real prices of between30 and 40 cents per pound (in 1950-54 dollars) caused a serious over-productionin Brazil during the 1930's which, coupled with -world wLde depression andweak demand, reduced real prices to the 20¢ level. But this fall does notrepresent free market conditions as Brazil controlled her volu-me of exportsand destroyed surplus production. A purely competitive market wfould havewitnessed greater declines than are sho-'m in Chart 2.

Two attempts have recently been made to indicate, bUt -ot lorecast,,

the probable price of coffee. The International Iionetary Fund / hasrecently appraised the present 955-`6 situation under the assumption thata fixed and known exportable production was sold at a price that would declineto the level necessary to increase consumption to clear the marKet'". Itwas assumed that existing stocks of surplus coffee produced in previous yearswould continue to be held off the market. The conclusion was that irith aworld consumption level of 33 million bags, and an estimated exportablesupply of 36.6 million bags, the price of coffee in terms of Santos 4's wouldfall to between 32 and 38 cents per pound depending on the choice of

assumptions used as to the character of United States demand (for detailssee Appendix IT). This price was on a f.o.b. Santos basis; the equivalentNew York spot price would be about 34 to 40 cents,

Since this report was written, the trade estimate of world exportableproduction has been increased to 39.0 million bags ./, and there has

been an equivalent increase in estimated consumption. Presumably, therefore,the estimates, if made now, would show a similar reduction in price.2/

The Report of the Inter-American Economic and Social Council ofDecember 1955 gives estimates of possible prices of Santos 4's at Newl Yorkbased on the method of multiple correlation analysis involving price, supply

and consumption. The results are shown below in tabular form:

/ "Prospective Price Developments for Coffee and Their Effect on the

Payments Position of Exporting Countries", October 24, 1955.

2/ The U.S.D.A. estimate is 39.5 million.

I/ Tn fact- Santos . nrices have in 1955/56 ranged between 50 and 600 in

New York, probably due in large part to the withholding of almost4 million bags hy Prazil (see Table 3)

7_02

Projected Prices of Santos 4 Coffee at Nevw York asDetermined by the Report of the Inter-American Economic and Social Council

(Cents per Pound)

Assumptions 1956 1957 1958 1959

1. Optimistic 5 5 44 432. Neutral 43 43 42 393e Pessimistic Li 37 33 284. Very Pessimistic 39 33 27 21

The alternative assiimn±tions relate to the level of real Der canita disDosableincomes and prices as compared with the year 1954 (see page 10 of the Report).

The Report also states:

. . . . . . it is well within the realm of statisticalprobabili-tr fri- pric to dlir-ine even more- sharnlv

than the above projections irply . . . . . .. . . . .No claim can be mrade for preciseness in studyr of this

kind, no matter what techmiques are employed. Specifi-cally, the possibility cannot be ruled out, on the basesof statistical analysis, that under the assumptionsprovide above, prices mL'ghlt decline to points 10 percent below the projections given. The direction andgenerai magnitude of our projected price chuanges areimportant, rather than the particular figures cited"'

For reasons given in Appendix IV, any attempt to apply pritelasticity concepts to a short-term situation is more apt to mislead thanto inform because the data simply do not exist to measure quantitativelythe probable inventory changes result ng t roc m marked pric.e changes in short

periods. Nor does the experience of the past provide an adequate answerto such questions as the price dlfferer.tials 11l r ilto nrevai41 in a situationwhere mild coffees are likely to be in barely adequate supply while Brazilians

and robustas are expec-ted tc become increasingly plentiful after 1957?

For these reasons,mechanical projections appear to have limitedusefulness on the concrete situation ahead. What is significant is thatthese and other studies all indicate the likelihood that probable supnlv

will exceed probable demand and that coffee prices w,ill tend to fall in acompetitive or nearly competitive markcet.

Table 1

A-ual Averae- !;jo-l ofe nov

Thousand Bags)

- an -i - r' n^ 'I n nrL r n .nor' to inl.r) I.I. In ). -In nrf )-n t1.Country 9 0913 1925-29 10 _) 4 ' 7 7 -L940-44 ' 74,'-"7 l7

united States 6,828 10,659 12,025 13,900 16,366 20,6'8 19,446

EuropeFrance 1,862 2,721 3,108 3,036 692 1,262 2,688Scandinavia I;/ 1,253 I1,2 l,06 20U3)4 4U6 1,9 1 145

Benelux 1,307 1,245 1,f461 1,462 128 1,505 1,238ItaLy 438 754 695 568 72 r463 962Germany / 3,016 2,006 2,398 2,663 191 118 1,031United Kingdom 174 291 299 273 546 71i 638Switzerland 190 210 247 289 165 280 339Other 1,550 1,343 1328 1,185 366 460 874

Total 9,790 10,202 11,342 11,510 2,623 5,990 9,515

Other CountriesArgentina 213 391 359 401 482 542 507Canada 106 188 243 302 448 569 713

South Africa 199 2114 213 253 403 381 213Other 617 1,022 950 1,230 1,338 1,571 1.223

Total 1,135 1,811 1,765 2,186 2,671 3,063 2,656

WMJorld Total 17,753 22,676 25,132 27,596 21,660 29,6-71 31,610

1/ Finland. Norway, Sweden, Denmark.Western Germany after 194L5.

Table 2

Annual AverageWorld Coffee EZcorts

(Thousand Bags)

1925-29 1930-34 1935-39 19L0-44 1945-49 1950-54 1950 1955

Brazil lL.l 1149 1501 10Q8 16.3 11t-7 11 0 8 l3-7Colombia 2,5 3el 400 4.4 5a4 5.3 405 5e9Other LatinAmerica 4.2 465 4.8 4z.2 4.5 565 4.9 6.4

Total WesternHI-Tm.i..snher 2CLR 22.5 23@ 19 4 26.2 25.5 2)02 26.0

Africa 0,8 l03 203 20 ' ° 5,2 14.6 6.9Asia & Oceania l17 1.6 16 Ool 0.2 o,6 0o.4 0.5

World 23,2 25.4 27.8 22.0 30.4 31.3 29.2 33.5

PCrCy tint Shares_of l.orGffee hvrts

/0 /0 % % % g %

Brazil 61 59 54 49 54 47 51 41Flo-r,.bia 11~ 12 1 018 17 1if 18

Other LatinA,-.er, C1R 1 7 10 1C 1 1'7 1 o

TL - vl-rot-al westernnHemisphere 90 89 86 88 87 82 83 78

Africa 3 5 8 12 13 16 16 20Asia & Oceania I ' U U C .5..

.JAJV JAJV .LUU ±UU .LUU JAJV Less t.hV

a/ Less than ~

±du±tu .)

BRAZIL

Coffee Supply and Distribution

(thousand bags of 132.3 pounds)

OpeningStocks Exportable Total StockJuly 1 1 Production 2/ Sjnp- Exports Change 3/

1945-46 16,800 11,394 28,194 16,007 - 3,u00

1946-47 13,000 12,608 25,608 14,373 - 400

1947-48 12,600 12,253 24,853 16,125 - 2,600

1948-49 10,000 15,750 25,750 17,745 - 2,450

1949-50 7,550 14,945 22,495 16,935 - 1,600

1950-51 5,750 15,716 21,466 16,593 - 821

1951-52 4,929 14,962 19,891 16,333 - 1,977

1952-53 2,952 16,100 19,050 14,968 f 352

1953-54 3,304 15,145 18,449 14,325 / 15

1954-55 3,319 14,496 17,815 10,796 , 3,197

1955-56 a/ 6,516 / 21,848 28,364 17,280 + 3,768

a/ Partly estimated

l Includes 3,211,000 bags of Government-owned coffeepurchased from the 1954-55 crop and excluded fromthe commercial supply.

2/ Represents registered stocks in ports or up-country awaitinglihotrintn. nDoes not 4t^1-,Ae iicffee.-

2 / Pvep.esens inera registration fory c11,,m.n-h toA ports P.ence

"exportable" refers to shipment from producing areas rather than

>/ RePaes4ent- the dlference 'beuve en the stu. of reg-istered stocks

at the beginning of the season plus registrations during theseasond c rom curretc a.nd ptevious crops nand tlue sU of eortsand coast and port conswnption.

0

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rlGCir Qr1r rlrlr lrlr H r- r r) rli (t IN tQll^lC)

0~~~~~~~~~~~~~~~~~~~

^4L ~~~~~~~~~~~~~~~~~~~~~~~~~~~~aBC) CH1 O)

; z a~0) ¢a-I *b.fl@ * . . e @ - * . *

(I) d ~~~~C) H- C~J C-~'. -a:) 0'. C C\i CN-:ZtIr\'.0 E-C()ON 0'Z) H- (\ cy'! .tci4 oa) 'n F. *r\lor\ C OC)y-c\ Nro, rf% '.o.-\( '. * O0 ' t -. r O 2 -4 \ liN rl

Eq ~ ~ ~ ~~~~~~~~ - r- rO r- r-i r-l rr-l- i r-l - - r-l r-1 r-l r-1 r-A *-d r-J iN H f-i r-S iH 4 U^ rt D

U)U)5co

Table 5

World Cof.,~eeExos(in thousands of bags)

ountry of' Origi gn-0 n 12 1359__

WestIUl 'l-l-nemspllereBrazi' 14,835 16,358 15,821 15,562 10,918 13,696

Co.lom.bia LJ,472 44,79Y4 32 o,632 5,4El Salvador 1,107 1,059 1,o098 1,267 1,112 1, 185Guatemala 919 848 1,007 1,149 996 982Me3.ico 767 865 870 1,159 885 1,367Haiti 390 417 541 372 517 3Venezuela 309 308 498 733 431 497Costa Rica 312 309 333 465 365 463Dominion Republic 223 290 442 374 400 409Ecuador 335 273 340 311 351 384Nicaragua 350 268 303 312 285 379Honduras 113 137 138 187 154 149Peru 14 37 45 78 76 114Cuba - - - - 75Other 45 52 67 90 92 118

Total 24,191 26,015 26,535 28,691 22,336 26,040

AfricaFrench Africa g 2,019 1,830 1,947 1,797 2,547 2,669Br. East Africa 1,000 1,213 1,325 1,108 1,156 1,874Angola 626 2/ 1,074 J 794 i/ 1,193 783 925Belgian Congo 554 590 515 566 573 700Ethiopia 315 458 424 467 550 600Other 139 lo' 115 112 172 166

Total 4,653 5,269 5,120 5,243 5,781 6,934

Asia & OceaniaIndonesia 228 402 313 548 637 420India 15 14 40 15 60 60Other 142 140 125 150 99 55

Total 385 556 478 713 796 535

World Total 29,229 31,840 32,133 34,647 28,913 33,509

1/ Includes: French W-est & Equatorial Africa, French Cameroons, Togolandand Hladagascar.

2/ Includes: Angola, Cape Verde, San Thome and Principe.

m

WiorlU Coffee(Thousand of bags)

1950 1951 1952 1953 1954 1955

United States 18,440 20,357 20,274 21,065 17,092 19,650

EuropeFrance 2,493 2,522 2,771 2,842 2,811 3,042Scandinavia / 1,357 1,474 1,860 1,972 1,964 2,204Benelux 1,278 1,i95 1,194 1,348 1,175 1,306Italy 636 889 1,016 1,112 1,158 1,206Germany 2/ 443 677 942 1,311 1,727 1,952United Kingdom 676 721 720 507 568 574Switzerland 421 331 304 319 319 299Other 1,098 825 885 770 791 888

Total 8.402 8.63 2692 10181 11.471

Other CountriesArgentina 480 476 518 494 565 493Canada 626 669 738 813 721 785South Africa 280 198 201 196 190 185Other 1.290 1.328 1.174 1.276 1.046 1.235

Total 2.676 2.669 2.631 2.779 2.522 2.698

World Total 2q.518 31_658 32.597 3U.025 30.102 33.819

/ Finland, Norway, Sweden, Denmark.9/ Western Grvmany after 1945.

CHART I

ACTUAL COFFEE PRICESSANTOS NO. 4, NEW YORK(CENTS PRL POUND)

I 001 I v mrm mrm mr n m m 1~n mm l 100

lao 1~~~~~~~~~~~~90

80-I I F I I ~ ~ ~~~~~~~~I l I

601 60 T 11(

401- 1 1 4 0

21:1 1 ;L__ 1 1 1 1I ki11150~~~ I ~~~~~I I 1A 1

401- 1 I I SW + + f-IPI 10

1930 'I2 192 192 193 193 194 19 2 95 1305AA ___ I _~~~~~~~~~~~BR -c 1I -

CHART 2

REAL COFFEE PRICES* ANDWORLD STOCK CHANGE**W \NORLD STOCK CHANGE A [ ,EXPORTABLE PRODUCTION

(MILLIONS OF BAGS). i .. A n ^s | MINUS WORLD IMPORTS

+ 10 A 1+10

ALXA Aih 0: *.

I *iSTOCK CHANGE AFTER Vw ~~~~~~~~ALLOWING FOR DEST RUCTIONV

iN BRAZiL oII I I I I I I11

8 0 D8 1 1 ' 1 £ 180

SANTOS NO.4, NEW YORK A(CENTS PER POUND)

701 { 11 70

501 1 T 1 1 1 1 El 15

40140 t 1 f 40

I I I I 1

201N II/ IF-O 1 IV. I '_ I _ \.LL 1 2 0

0 L ... W~~4 Il

1913 15 1920 1925 1930 1935 1940 1945 1950 1955

*Actual prices defloted by the 8LS General Wholesale Price Index and expressedin terms ot 1950-54 average coffee prices (59 cents per pound)

**Stock change is difference between exportable production ond world imports IBRD - Economic StaftI ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1114