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Coffee's Institutional Economy

 As we have seen in our section regarding the history of coffee, the cultivation of the product was dominated by the Arabs until the XVII century. The Dutch, French and Portuguese later developed coffee plantations in their Asian, American and African colonies as the bean is best cultivated in the tropics. This situation lasted while the European powers maintained control over their foreign territories.

Coffee became one of the most important detonators for the economic development of Brazil and of other Latin American countries during the XIX and XX centuries, not only because of its importance in generating income, but also because the requirements for producing coffee created internal markets that demanded other goods and services. The production of coffee did not require expensive imported inputs and generated desired incomes from exports for fragile economies with little exposure to international commerce. In the case of Brazil, it was this industry established in Sao Paulo, Paraná and the South of Minas Gerais, the owners of the so called "fazendas brasileiras", that permitted the consolidation of a local aristocracy. They kept for many years the political power and accumulated sufficient capital for the development of other industries. Consequently, the policy of the most important coffee producer of the world searched for decades to maintain higher prices paid to producers, in many cases taking unilateral measures.

In 1905 the Brazilian state of Sao Paulo introduced for the first time a non market instrument to stabilize prices. The price mechanism implied that producers from Sao Paulo reduced unilaterally their supply of exports in order to elevate international prices. The same price control mechanism was used in Brazil in 1917 and 1921. Between 1927 and 1928 the Coffee Institute of Sao Paulo began to buy coffee in order to stabilize the external supply of coffee and prompted other producers in Brazil to join in the effort.

In the years after the Great Depression the producer countries of America united under the Pan-American Coffee Conferences (in Bogota in 1936 and in the Havana in 1937), which never reached an agreement in order to regulate the supply of coffee in the global market. Consequently, Brazil continued with its unilateral measures to destroy coffee inventories utilizing pubic resources, which reached important volumes in the period that lasted from 1931 to 1938. In fact, the destruction of coffee in Brazil during that period surpassed 69 million bags of coffee, nearly twice the annual production registered in the period from 1935 to 1940.

During the Second World War the consumption of coffee contracted again, but this time because of the impossibility in supplying European markets due to the ensuing conflict. With the desire of encouraging the permanence of Latin America solidarity with the allies, the United States backed the Interamerican Coffee Convention of 1940, an event that initiated a second period of regulation of the coffee market. In this convention the member producer countries, including Brazil and Colombia, fixed export quotas for the trade within the United States. The United States in this role acted in some way as a guarantor for the compliance of the agreement, but in reality there was no effective way to ensure that the countries did not violate their word in regards to the export quotas. At first, the agreement included quotas for the rest of the world, which were complied with in as much as the maritime transport situation normalized.

After the Interamerican Coffee Convention of 1940 and until 1962, several other pacts and commitments were ratified within the framework of the Pan-American Conferences, thus introducing new elements of regulation to the coffee market. For example, in 1954 a Gentlemen's Agreement was signed in Rio de Janeiro between the Brazilian Coffee Institute, the Colombian Coffee Growers Federation and the Central American Coffee Federation. It was directed towards establishing a minimum price of sale in international markets. This Interamerican Coffee Convention stands-out because it was the first in which the principal coffee producing countries participated (at this moment the African coffee production was marginal) as well as an important coffee consuming country, which set down the basis of similar future initiatives.

In 1962 the third wave of coffee agreements began within the frame the International Coffee Organization (ICO). The different agreements and export quotas of the ICO date from 1962, 1968, 1976, and 1983. The initial pact from 1962 stands out as the first multinational coffee agreement in which the vast majority of producer countries, that represented 90% of the world production, and the most important consumer countries participated. The objective of the first agreement of the ICO was to stabilize external prices by means of seeking broad compliance with export quotas. In order to adjust the level of domestic supply with the quota assigned, producer countries had to store coffee or impose taxes on production. The export quota system worked until July of 1989, although it was suspended during several periods. The compliance with these quotas was usually suspended when a frost that affected coffee plantations would take place in Brazil, thus allowing other countries to export greater volumes to the international market in order to take advantage of the greater prices and reduce in the same way the price volatility.

The ICO continues existing under agreements that no longer consist of export quotas and instead center on instruments of cooperation between countries in order to assure the sustainability of the industry in a free market context. The organization counts with over forty producer countries (including the three principal producers, Brazil, Colombia, and Vietnam) and thirty consumer countries, amongst which are the European Union and the United States. This last country became once again member of this organization in February of 2005.

There are a number of institutions representing the private sector in the coffee industry. In North America the National coffee Association, the coffee Association of Canada, the Specialty coffee Association of America and the coffee Quality Institute stand out. In Europe, apart from the different national associations represented by the European Coffee Federation, there is also a Specialty Coffee Association of Europe. In Japan, The al Japan Coffee Association is also well recognized.

Similarly, many coffee producing countries have their own institutions associated with the coffee industry, many of them being private trade associations or bodies that depend from a government ministry.   In Brazil the Cecafé represents coffee exporters and ABIC the coffee processing industry.   In Mexico and Central America the Mexican Coffee Council, Guatemala's Anacafé, the Salvadorian, Honduran and Costa Rican Coffee Institutes are important institutions in their own right. In Africa countries have Coffee Boards, such as Kenya's, or other institutions that generally depend from their respective governments.


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