Financial Daily from THE HINDU group of publications
Tuesday, Aug 20, 2002
Agri-Biz & Commodities - Coffee
Draining the bitter cup
P. P. Prabhu
With coffee growers in deep distress on account of farmgate prices crashing to all-time lows, every help possible needs to be extended to them K. K. Mustafah.
COFFEE growers have been experiencing one of the worst periods for the last two years, with the farmgate prices crashing to all-time lows. The Robusta Cherry price is now ruling in the ICTA auctions at around Rs 5 a kg. The average price obtained last year also was only Rs 29, whereas during the previous year, the price was Rs 40 a kg. In 1999, the price obtained was Rs 60.
The situation is no better for Arabica. The price of Plantation "A" is hovering at Rs 52. Last year too, the price was only Rs 56, while in 2000, the price fetched was Rs 80. The reason for this disastrous price situation is well known. World production has been out-stripping demand during the last few years and the demand-supply mismatch has exerted pressure on prices.
The annual global production which was around 95 million bags (of 60 kg each) on an average during 1994-95 to 1997-98, jumped to 110 million bags during the period 1998-99 to 2000-2001 (annual average). Consumption has been growing, but only marginally. The overhang of bulging stocks has been having a depressing effect on world prices. Vietnam that produced around 1.4 million kg only in 1990-1991, produced over 11 million kg last year and emerged the second largest producer. Since most of its production is Robusta, the impact on Robusta prices has been disproportionately more.
Coffee growers are aware that their problems have been mostly due to global oversupply and consequent pressure on prices. But some analysts see the liberalisation measures initiated in 1991 as the reason. The withdrawal of quantitative restrictions on import of coffee is also cited as one of the causes for the unremunerative return, though hardly any import comes in for home consumption because of high import duties. These misconceptions need to be cleared and misinformation corrected.
It is not known outside the coffee circles that prices remained at attractive levels during 1976-1989 because of regulation of supplies through quotas among the producers, under the International Coffee Agreement (ICO). The system collapsed in 1989 and consequently the prices crashed. The ICO indicator price of Robusta which, during the entire period remained at over 100 cents/lb, nose-dived to 53.60 cents in 1990.
The drop in prices preceded and, therefore, cannot be attributed to the liberalisation measures initiated in 1991, nor to the decrease in the interventions by the Coffee Board. In fact during, 1997,1998 and 1999, the average auction prices of Robust were Rs 66, Rs 72 and Rs 60 a kg, respectively. Plantation - A fetched Rs 129 a kg in 1997 and Rs 114 in 1998.
It is appropriate to point out that the withdrawal of the Coffee Board's role in coffee marketing was entirely at the instance of the grower community and in response to their persistent and near unanimous demand. Even in today's depressing market conditions, the grower community may not be willing to give up their freedom from Coffee Board's intervention. There appears to be an inadequate awareness of the significant role being played by, and the contribution of, Coffee Board in the area of research and extension support to growers.
Coffee research in India has over 75 years of rich and fruitful tradition and some notable successes. It has become the norm to blame the WTO Agreements for most agricultural problems. On the contrary, the advantage of the free and non-discriminatory market access under the WTO agreement should not be underestimated in the present circumstances. We have to perforce export nearly 80 per cent of production for survival of the industry as domestic consumption is limited and can grow only gradually. Therefore, if we are unable to export coffee at international prices (either because of discrimination by major importing nations or for any other reason), the loss to the growers of coffee will be greater.
There is a misleading campaign that input subsidies would have to be phased out under the WTO Agreements, which will worsen the earning capacity of the small growers. There are no such obligations on India. If the Government decides to limit subsidies on account of budgetary constraints or other reasons, it is entirely a different matter, but GATT disciplines do not demand such an action.
In fact, the government has been giving transport subsidy and ensured a relief package for the coffee growers. A demand has been raised that a portion of the export earnings from coffee be returned to the growers by way of subsidy. Actually, the entire proceeds from exports go to the growers only, barring the usual trade margin and expenses on transport.
There is, definitely, a case for increasing the quantum of assistance and helping the coffee sector, but the constraint is resources. A proposal that the coffee growers be given subsidies to the extent of, say, 10 per cent of total value of exports may not be realistic.
The point is that the WTO Agreements would not come in the way of government extending higher subsidy to coffee growers. Instead of trying to pin the blame on extraneous factors, it would be productive to find practical solutions to enhance the incomes of the growers. So long as the problem of global oversupply persists, it is unlikely that prices would improve. We cannot also "protect" the market for the coffee growers, when nearly 80 per cent of the production has to be sold in the overseas markets; the prices obtained for the 80 per cent crop would determine the average realisation to the growers.
India's share of world market is only around 4 per cent and cannot, therefore, influence market prices. There is criticism that the problem of the growers would not have become so acute, had the industry not neglected the domestic market. The growth of the domestic market will, no doubt, be beneficial. There are many private players trying to create a market for coffee. But it needs to be appreciated that there are many competing demands for the limited purchasing power of the consumer and among the beverages, tea is a low-cost beverage. If the domestic selling price of coffee were to go up much, the growth of consumption may well be affected. It is also worth stressing that the growers on the whole have benefited from export orientation, as the average export price obtained during the last two decades has been quite satisfactory.
The rapid growth in production in the last decade, from 1,69,700 tonnes in 1990-91 to 3,01,200 tonnes in 2000-01, confirms partially that the returns were not unattractive. Given the limited domestic market, the desirability as well as the benefit of global orientation is obvious.
There are also greater possibilities of obtaining better prices for coffee in the richer consuming countries, whether it is for organic coffee or specialty coffee. While the quality of Indian Robusta, especially washed Robusta, may be good, Indian coffee is sold as a commodity and not as a branded product, more because much of the production comes from small holdings. The varieties are many and consistency in cup quality has been a problem. The buyers look for volumes and regularity in supplies, besides maintenance of quality. These constraints affect the prices Indian coffee can command.
In tea, the advantage of estate branding and maintenance of strict quality parameters by the tea companies, help many producers secure reasonable prices in the overseas markets, notwithstanding the market conditions. Some coffee producers also have been able to secure better prices because of stricter quality control measures introduced and closer association with overseas buyers.
There is no doubt that the coffee growers are in deep distress. In these depressing conditions, every help possible needs to be extended to the growers. Lasting and secure benefits will flow when India proves itself as a reliable supplier of quality coffee; and still better, if the country can supply minimum required volumes.
There are many things that are wrong with the WTO; but the WTO agreements and IPR issues are not germane to the present plight of coffee growers. But this should not blind India from taking initiatives that will help to not only tide over the present difficult situation, but also ensure permanent improvement in the coffee industry.
(The author is a former Union Commerce Secretary.)
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