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A North - South Product

Within the international commerce of goods and services, the trade between the most developed countries ("North - North") is much wider and diverse, and of bigger impact, than the one that takes place between the developed and the less developed countries ("North - South").  As coffee is mostly produced in tropical zones it is considered a North - South product because its commerce is primarily carried out between developed countries buying the beans and developing countries producing it. Of the all the coffee produced in the world, around an 80% is destined for the international market and just the remaining 20% is consumed internally in the producing countries.

Coffee is produced in more than 60 developing countries. Approximately 25% of worldwide exports come from Brazil, followed by Vietnam with a 15% and Colombia with around 11%. The remaining half of worldwide exports is shipped from countries of Central and South America, Asia and Africa. On the other hand, the main importers are the United States (25%), Germany (18%), Japan (8%) and Italy (8%). The enclosed map illustrates, by the size of the red circles, the relative size of the biggest markets. It underlines the fact that the biggest importing countries are located in the "North". The blue circles identify coffee growing areas by their relative size of coffee production, and exports.

During the 19th century and a good part of the 20th century, coffee was the second commodity more transacted in the worldwide economy, after oil. To the extent that more than twenty five million peasants produce and depend on coffee, and that a great proportion of the demand is concentrated in developed countries, the coffee industry acquired in the postwar world a great geopolitical relevance. The western developed countries, conscious of the high social impact of coffee and the dependence in the external income for dozens of producer countries felt that this product could constitute an effective way of cooperation during the Cold War. Thus, the international coffee prices became the focus to implement cooperation schemes to assure that a predictable level of coffee income to producing countries, and in that way to be able to contribute to their political and social stability.

The coffee market has certain structural characteristics of supply and demand, such as low price elasticities and low income elasticity that supported the design of a cooperation framework in the international arena during and after the Second World War. At first producing countries established an association tending to regulate coffee prices in 1940 through the Coffee Inter American Agreement, which implemented export quotas between the Latin American producing countries to the United States market. After this agreement, in October 1954 another accord known as the "Gentlemen Agreement" was signed between the Brazilian Coffee Institute, the Colombian Coffee Growers Federation, and the Coffee Federation of Central America and Mexico. It agreed minimum fixed prices during eight months. These countries later attempted to build mechanisms that would allow for the control of supply as well as the retention of excess inventories during the surplus Brazilian 1955 - 1956 crop, and the high production obtained then by Colombia, El Salvador and Mexico. This effort had a positive effect in prices during the 1955 - 1957 period.  In one of their meetings, towards the end of 1954, delegates from countries in Europe and Africa were also present, thus constituting the genesis of global coffee cooperation that served as a frame for the creation of the International Coffee Organization (ICO) a few years later.

However, these agreements were not always successful. The continuous fall of coffee prices obliged as from 1958 gave rise to the creation of the first International Coffee Agreement of 1959, which counted with the participation of most of the Latin American producing countries, and which entered into force in 1962. Since then, successive agreements and prorogations took place, the most recent being the one approved by the International Coffee Council in September 2007.

The above mentioned agreements allowed the creation of the International Coffee Organization (ICO) in 1963, and the existence of global export quotas between 1962 and 1989. During the Government of John F. Kennedy, and its Alliance for Progress initiative, several similar agreement were signed aimed to regulate commodity prices and commerce between, the  ""North" - "South", with the participation of the producers as well as the main countries consuming the beverage to enforce such quotas.

The fact that importing countries were part of the agreement is up to a certain point exceptional, as any agreement that restricts a supply of a product implies an increase in its prices and an adverse effect on consumers. In this context, there are two reasons that explain the participation of the importing countries in this type of multilateral arrangements. The first one is related to the fact that consumers will also obtain benefits from instruments that will reduce the price volatility of a good. These controls helped to mitigate the price increases in times of shortage of the product, thus reducing the volatility of the quotations allowing the industrials to obtain more predictable profits. The second motivation has a geopolitical nature and it is associated to the objective of helping the poorer nations that are the producers and exporters of commodities. The search to improve the conditions of producers and to maintain their income has a clear positive effect for the economic and social stability of many countries and for a high number of people, reducing the perceived risk that they will fall pray of "communist ideas". It is worth reminding that the number of people, producers and their families, that depend on coffee are equivalent to a total population similar to that of Japan, without counting the persons that derive their income from processing, distributing or from marketing coffee in the world.

Since 1989, with the expiration of the quota Agreement, coffee prices showed an uninterrupted fall until 1992. The price has shown a great volatility that can be characterized in two big periods: the first one, between 1993 and 1997 of higher prices, and the second between 1998 and 2005 in which the coffee quotations were extremely low. These variations find their explanation in the interaction between the supply and demand, due to which, in a non regulated market after the quotas agreement, new producers entered the industry which implied an over-supply of coffee beans.

An example of the above changes, is the growth of coffee production in Vietnam, a country that in 1989 was a marginal participant in the world coffee market.  Since then, this country incremented its production to reach a yearly rate of 16% and therefore became the second worldwide exporter of the bean. During the period of 1989 - 2008, Brazilian exports also increased gradually to a yearly rate close to 3%, maintaining its preponderance in the market. Colombian exports have shown a more modest growth rate that has been complemented with the development and successful management of a strategy of generation of added value for the Colombian coffee growers. As a result from this, the worldwide exports have increased at a yearly rate of close to 1,5%, but at higher rates when measured in terms of income. On the other hand, consumption grew during the same period of time at a rate equivalent to a 1,7%.

The implementation of international agreements was one of the reasons why countries developed different systems of administration of their export quotas  to be able to fulfill their responsibilities. Many of those systems had their origin in the colonial legacy and others were being developed with using different models. Thus, producing countries created institutions oriented to promote and direct their domestic production and coffee industry, and with them different models of institutions, creating an institutional economy for coffee. One of the most exceptional models is the one belonging to Colombia, the Colombian Coffee Growers Federation(FNC), whose relevance as developer of added value projects and as implementer of environmental and social projects in its Sustainability That Matters programs is still considered exceptional in the rural world.


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