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Friday, Aug 30, 2002

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Coffee: Needs a potent brew

Lakshmi Venkatachalam

IT IS true that coffee prices are at historical lows and the industry is facing its worst crisis ever. As in all other agricultural commodities, price cycles are inevitable. However, the present crisis is unique in that it is rooted in a chronic and structural supply problem. It also needs to be viewed against the backdrop of the transition that the coffee market is undergoing in recent years in India and elsewhere.

Liberalisation of the coffee market from the compulsory pooling system (the raison d'tre of the Indian Coffee Act, 1942) to free trade since 1996 exposed growers to free market forces. This was done on the persistent demand of the coffee growers that coffee marketing should happen without controls.

Before this, the international regulation of supplies through the ICO quota mechanism, which was in operation for over two decades (and considered one of the best examples of North-South cooperation), was given up in 1989.

The abolition of any supply regulation mechanism meant that the global coffee trade came under the open market. Consequently, many countries which exercised controls over production through government bodies had to either abolish them or modify the functions to suit the changed scenario.

The 1990s thus saw an improvident expansion of coffee growing areas and increased production.

Due to five years of fairly high prices from 1994-1998 (the average ICO composite indicator price was 124 cents/lb compared to 54 cents in 2000 and 2001), investment in coffee plantations boomed — in India and the world-over.

Very high international prices in this period saw exports soar with little incentive to grow the domestic market. By 1998, the demand-supply mismatch was looming with surplus production and prices began their downward slide, reaching the nadir in October-December 2001.

Coffee is an export-oriented commodity for the simple reason that its consumption base is concentrated only in South India. Therefore, during the pool-marketing period, the thrust was more on exports rather than on domestic consumption because whatever was produced could be sold in the overseas markets — either to ICO members or non-members, thus earning foreign exchange. The domestic demand was, however, fully assessed and sufficient quantities to fulfil this demand were ensured. In fact, domestic roasters were offered coffee at very low prices and consumers insulated against the volatility of the international prices.

Despite the low prices and the Board's promotional efforts, Indian consumption because of constraints relating to consumer attitudes and preference. In the current low price situation, where the gap between the producer and consumer prices are far wider, the government cannot control retail prices because it is not an `essential commodity' as are foodgrains or tea.

There is also a patent fallacy in the notion that domestic consumption growth will immediately translate into higher prices for Indian coffee growers. In an open, post-WTO economy, domestic prices cannot be insulated from international price trends and if the gap widens abnormally, the pressure for imports from cheaper origins will gain momentum. Indeed there is empirical evidence to show that following the 1994 Brazilian frost and the resultant high international prices for coffee, which coincided with the liberalisation of coffee marketing in India, the domestic coffee prices went up to very high levels having an adverse impact on consumption levels.

Therefore, it is really a faster growth rate in coffee consumption concurrently the worldover and not in the least in new and emerging markets (India is one) that will lead to a better match between global demand and current production capacity and, therefore, better international prices.

Likewise, the while falling producer prices do not get reflected in lower consumer prices, which may help to stimulate demand (our database reveals there has been a 33 per cent drop in average consumer retail prices of R&G coffee powder in 2001 compared to 1997 levels, while the comparative drop in average producer prices for the same period is more than 56 per cent), the advantage is that when producer prices do go up, it should not result in a dramatic rise in consumer prices resulting in perceptible fall in demand.

Retail prices in such a beverage as coffee are sticky and offer less scope for frequent adjustment without seriously affecting demand. Bearing this in mind retailers/roasters would rather offer more for the same price with other freebies than roll them downward drastically when producer prices fall.

Further, any strategy to grow the domestic market for coffee has to be predicated on a proper long-term policy for maintaining supplies of consistent quality in the event of an export "pull" during global shortfall in supplies and high international prices.

This is an important and persistent concern expressed by domestic roasters/retailers.

Doubts have been expressed of late in the media and elsewhere that the Government and the Coffee Board have turned a blind eye to growers' sufferings and neglecting the industry's long-term welfare. These need to be addressed by placing certain facts and issues in proper perspective.

Production and quality improvement programmes, market research support, export and internal promotion initiatives of the Board are medium- or long-term measures already in the process of implementation in the Ninth and the Tenth Plan periods. More recently, a strategy achieving value and growth in exports in the medium-term has already been put in place on the basis of the McKinsey report.

It includes initiatives to shift the product-mix in favour of washed Arabicas, where India is more cost competitive vis--vis relevant competition, ensure competitive landed price for Indian coffee by reducing growing costs via increased yields, incentivising production of quality coffee, guaranteeing reliability of exporters, and improving awareness of Indian coffee through an aggressive communication strategy. These initiatives will have to be periodically fine-tuned in the wake of the international market developments to have effective results.

As for the domestic market, it is impossible to expand the domestic market within a very short span. Even Brazil, the largest consumer among producing origins, took ten years to double its consumption levels and, significantly, this was entirely by initiatives from the industry. At any rate, a strategy here should be based first on a sound understanding of the consumer attitudes and preferences to coffee.

To this end, a nationwide survey was conducted by the Coffee Board in 2001 and strategies formulated. Since roasters are an important interface between consumers and producers, efforts are directed to make them participate in the whole process of promotion of domestic consumption. Transparent marketing systems are encouraged.

The weekly auctions by the ICTA in Bangalore and futures trading through COFEI are two major post-liberalisation initiatives that are supported by the Board. These offer a price discovery mechanism for coffee.

All this does not mean that a crisis situation such as the current one does not require some immediate relief measures.

As in most origins, the Coffee Board/Ministry of Commerce (in the absence of a price stabilisation/support price mechanism for plantation crops such as coffee) persuaded the Reserve Bank of India to agree to a restructuring of debt as a measure of alleviating the immediate financial crisis of the coffee growers.

This began with the rephasing of crop loans in 2001 and followed by a comprehensive debt relief package (The Special Coffee Term Loan) in 2002 whose implications are quite significant in that the burden of debt repayment of term loans has been spread over a number of years including a provision for moratorium up to three years. Interest subsidy for crop loans for small growers was also provided by the Government in 2001-02 and is expected to continue this year.

The Coffee Board has also redefined its role to meet the changed free market scenario. To this end, comprehensive amendments to the Coffee Act have been proposed to make it more relevant to the present realities of the market place.

However, in the larger interests of the industry and the international market environment for coffee, the suggestion to revert to a pool marketing system with attendant control systems in the current crisis needs to be seriously questioned.

Neither a controlled pooling system or a support price mechanism in an export-oriented commodity such as coffee will help prop up sagging international prices nor help to dramatically increase domestic consumption.

What is required in an open market are measures enabling the empowerment of growers, especially small one who constitute the majority of Indian coffee growers, so that they have greater bargaining power.

Also required are structural changes and a simplified tax regime to strengthen existing institutions and develop new ones to compete effectively in the international market.

Thus, fostering development of co-operatives and self-help groups is integral to the strategy that will enable the growers to directly market their coffee through exports and in the domestic market by value-added forms. The coffee-curing industry has to restructure itself, modernise and develop new products and branding strategies to offer a different value proposition to importers and roasters.

The Coffee Board has been encouraging backward and forward integration of curers to facilitate an integral relationship with growers and exporters. Recent initiatives have included the annual "Flavour of India" Cupping Competition. It is a significant step to develop regional/estate brands and showcase the unique physical and organoleptic profiles of our coffees based on geographic distinctiveness.

Risk management schemes to protect the individual grower from the excessive price volatility through appropriate market based hedging instruments are also being considered. The levy of purchase tax, which has created unnecessary distortions in trade in the post-pooling era, needs to be reviewed.

In a free trade regime, and more so with a commodity such as coffee, which is fully integrated to the global market, there cannot be any unique solution.

Coffee is going through a secular change. Confronted with the new realities of the international market for coffee, coffee growers the world-over and in India have to change their mindset and attitudes to face future challenges.

Coffee in India is more than an agricultural export product — it is also a social, institutional and cultural fabric that is at the heart of the rural societies in the traditional coffee growing areas such as Karnataka, Kerala, Tamil Nadu and in the emerging areas in the tribal belt of Andhra Pradesh/Orissa and North-East India.

It offers work opportunities to thousands and in areas where there is no alternative occupation. It is also an indispensable part of a fragile eco system in the Western and Eastern Ghats.

Preserving such a culture is thus an economic, social and environmental imperative. But the need of the hour is to be able to survive and face the new realities of the international market for coffee.

And at the heart of these changes there is the compelling need to stay competitive and viable on all fronts failing which future prospects of the industry will be bleak. The long-term initiatives launched by the Board in the Tenth Plan are aimed at addressing these challenges.

(The author is Chairperson, Coffee Board.)

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