CARTEL'S WEAK BREW

CARTEL'S WEAK BREW

Think of this the next time you reach for that first cup of java in the morning: For consumers in the Western world, coffee is one of the best bargains around. And, despite occasional efforts by producing countries to limit supplies to boost prices, it is likely to remain a bargain for at least the next couple of years.

The main reason for this happy state of affairs for consumers - mirrored by hardship for impoverished producing nations - is simple supply and demand. A large number of producing countries together turn out between 100 million and 104 million 60-kilogram bags of coffee a year, while consumers use only about 80 million bags a year. Since that oversupply is expected to persist, prices are likely to remain where they are, or lower, until 2001.Coffee's rock-bottom price also tells another story. It reflects the difficulty of keeping a producers' cartel going, especially when its biggest member, Brazil, shows a tendency to renege on its commitments to limit exports. It also shows how producer cartels have almost no chance of success once consumers stop cooperating with their efforts to fix prices.

Earlier this month, at a meeting in Brazil, the world's major coffee producers made another attempt to raise the price of coffee, which, in revenue terms, is the world's second-largest traded commodity after crude oil. The 13 members of the Association of Coffee-Producing Countries (ACPC), representing about 70 percent of world production, agreed to a collective export limit of 50 million bags over the next two years. Their aim is to boost revenues from sales of the raw commodity, which now totals $10 billion a year worldwide.

After much haggling with Brazil, which produces one-third of the world's coffee crop, the ACPC countries agreed to national export quotas. Brazil's limit was set at 15 million bags next year (down from 21 million bags exported this year) and 17 million bags in 2000-2001.

Significantly, futures prices barely moved in response to the announcement, signaling that traders were not particularly worried. They had reasons to be nonchalant: Brazil exceeded its current-year export quota by 6 million bags, and has exceeded its quotas in the past. So have other major producers - notably Colombia, which represents one-sixth of world production. Moreover, the 30 percent of world production outside the ACPC orbit - including that of big producers like Mexico and India - is likely to undermine any target-price agreement made by the cartel.

In years past, traders probably would have taken more notice of such an agreement. Until 1989, the London-based International Coffee Organization, a 62-member club of producing and consuming nations, buttressed such price-targeting deals through agreement by importing nations to limit their purchases. They did so out of a mistaken sense that this was a good way to offer foreign aid to impoverished nations - essentially hiding the aid in higher coffee prices.

In 1989, however, the United States rightly decided to stop disguising foreign aid this way, and walked out of the ICO. That effectively restored a free market in coffee. It also, incidentally, removed the main reason for the existence of the ICO, which has been struggling to find a new role for itself in coffee R&D and coffee promotion.

Now the ICO is under further threat from the producing side, as Brazil and Indonesia are questioning its continued usefulness. Brazil may have its own agenda here: It can dominate the smaller ACPC, while at the ICO it is still one nation among many. But weakening or disbanding the ICO would be short-sighted for Brazil as well as for other nations. The reason is a change in the regulatory environment for coffee producers and processors alike.

National governments and international organizations are showing a growing tendency to regulate environmental aspects of agriculture throughout the chain of food production. For example, the European Union already has passed quality-assurance legislation allowing it to supervise all aspects of food production. Such issues also are expected to loom large in the millennium round of the World Trade Organization. The ICO offers a forum for both sellers and buyers of raw coffee to shape the development of these regulations, and perhaps to check governments' tendencies to over-regulate.

This week, ICO members meet in London to consider the organization's future. They have rightly abandoned any efforts to revive the bad old days of producer-consumer cartel agreements. But they would be ill-advised to take that any further. Both producing and consuming nations stand to benefit from an organization that promotes coffee consumption without trying to distort world markets.