Brazil and Intervention in the Coffee Market

Commodity exports were the mainstays of peripheral economies in the 19th century. Agricultural products were among these. Initially, these were inputs into industrial processes, often in the textile industry: think of Indian dyes, American cotton, and New Zealand wool.

Near the end of the 19th century, consumer demand enlarged markets for other ‘soft’ agricultural commodities. Coffee was one such product, much of it produced in Brazil. While Brazil’s economy developed on the back of the coffee tree, no source of wealth is permanent. Efforts to maintain strong pricing for coffee by means of government-arranged price fixing were resorted to but the results were not straightforwardly positive for Brazil.

Coffee

Brazil produced between 80% and 85% of the world’s coffee in the early-20th century. Most of this was harvested in the states of Rio de Janeiro, Minas Gerais, and São Paulo specifically. These three states alone accounted for between 75% and 80% of world production; São Paulo by itself may have been responsible for around 50%. Colombia and Guatemala were the only other producers of note. The cultivation of coffee constituted around 16% of Brazilian GDP and more like three-quarters of its exports.

Brazil did not maintain its coffee industry on the basis of advanced agricultural practices. Harvesting coffee there remained labor intensive and productivity-enhancing practices were not well established at the turn of the century. This mattered little when prices were high, as they were in the late-19th century. In these conditions, wages could easily be paid and immigrant labor abounded.

However, prices were sometimes high because of setbacks in production that limited the ability of planters to seize the very opportunity afforded by the high prices. For instance, frost could damage crops; an 1887 frost destroyed 40% of the Brazilian coffee crop. Drought, such as one in 1903, also reduced harvests. As a result of that drought, wholesale prices for coffee in New York rose from 5.5 to 8.5 U.S. cents per pound. In other periods, an absence of frost or drought for a few years led to surpluses and low prices.

The prosperity of coffee planters in the late-19th century did not last long into the 20th century. Prices for coffee fell sharply in 1896-97. After having risen for a few years, wholesale market prices in the U.S. fell below 10 cents per pound, a level to which they would not return for over a decade. Supply had caught up to demand, which had been growing for years. For planters, this created a stressful situation, made worse by an appreciation in the Brazilian currency, reducing export earnings in terms of the Brazilian milréis.

One silver lining was the new-found need for enhanced agricultural practices. Planters began to introduce labor savings practices. An individual planter may also have welcomed the fact that trees that had been planted a decade earlier were also maturing, increasing their output. However, for the industry as a whole, this was not a blessing; it could easily lead to overproduction, especially when weather conditions were favorable.

Taubaté Agreement

Brazil amassed a large crop in 1906-07 but, as always, it was not necessarily welcome. That year, Brazilian production rose to 20 million bags of 60 kilograms (or 132 pounds), as compared to 11.3 million bags in 1905-06. There was already a surplus inventory of 4 million bags too. Predictably, prices fell on the New York and Hamburg commodity exchanges where coffee was traded. Prices in New York fell back to 6 cents per pound, lows not seen since before the 1903 drought.

The large harvest thus created a problem. The commodity was central to the economy of the State of São Paulo and its neighbors and seeing its principal export cheapened risked the economy and those who depended on it, like the state’s creditors. So, the Minister of Finance of the State of São Paulo proposed an artificially high fixed price for coffee and expressly declared that the idea was encouraged by the demands of bankers. These banks arranged loans to Brazil backed by coffee production.

Accordingly, prices were fixed between the Brazilian states of Rio, Minas Gerais, and São Paulo under the ‘Taubaté Agreement’ of 1906. This pact imposed restrictions on new plantings of coffee trees by means of a high tax. An export tax was introduced too, starting at three French francs per bag but soon increased to five francs, and an extra tax was levied on exports if the total of exports exceeded a certain level.

Furthering government influence over the market for coffee, inventories under the control of the government of São Paulo, like those holdings that secured foreign loans, were withheld from the market. To keep the price in check, the state withheld from the market any production beyond 17 million bags. Based on the prices at which the government would buy or sell coffee, prices were fixed, initially between 32 and 35 milréis per bag and rising in increments to 40 milréis eventually. This was the policy; in practice, sales would only be made at higher prices still.

The policy allowed the State of São Paulo to borrow more money and, in turn, the borrowed money went towards purchases of coffee to both secure the loan and control the market price. A £3 million loan to São Paulo was made by J. Henry Schroeder & Co. of London and the National City Bank of New York in December 1906. This and other loans made to the state would be refinanced by a £15 million loan at the end of 1908. The national government of Brazil borrowed £3 million of its own through N. M. Rothschild & Sons earlier that year.

The São Paulo loans were secured by coffee. Seven million bags of São Paulo coffee were held in storage at U.S. and European ports for this purpose. When the cost of buying, selling, storing, and insuring this coffee was added to interest and fees on the loans, these financings were not particularly attractive.

One could say that at least the government’s coffee policy enabled greater borrowing. That said, the borrowed money did not go to productive purposes; it went to make the purchases of coffee that backed the loans and supported the fixed prices. It was a circular relationship of questionable value to the long run prosperity of the country. Price fixing by a government should support the public finances but this one seemed to do the opposite. Indeed, the cost of the debt could not be serviced with coffee export taxes themselves and, as a result, some expected the price fixing scheme could not last.

Prices

This may explain why coffee prices did not rise soon after the price fixing was announced. That would change following the lean harvest of 1907-08 though, when production came to 11 million bags. New York prices rose from 6 cents to above 8 cents per pound. The State of São Paulo was only selling coffee at a price of 73 to 75 francs per 60-kilogram bag (somewhere in the vicinity of $14.25 or 44.5 milréis). This comes out to just about 10-11 cents per pound. Before long, the accumulated surplus from 1906-07 was drawn down and prices kept rising.

In the following years, demand was increasing, but the production of the largest coffee-producing country was more-or-less frozen. World consumption was 90 million kilograms (198 million pounds) per month by 1911; consumers in the U.S. were responsible for 40% of this. World production was constraining this consumption so price for coffee doubled, reaching over 13 cents by the start of 1911 and 15 cents by the end of that year.

Outcomes

In the long run, the coffee policies in Brazil had mixed results. Prices did remain elevated for a while. New York wholesale coffee prices rose at the end of the First World War, crashed in 1920-22 but soon began to surge higher again. Brazil’s commitment to keeping prices under control continued into the 1920s. The Instituto de Café do Estado de São Paulo was established in December 1924 to regulate the coffee industry by means of establishing export quotas.

The government increasingly wanted to pursue this policy independent of the interests of planters. It had its own objectives, believing that high prices for coffee could lead to a better balance of trade and the establishment of a gold standard in Brazil. Things didn’t turn out this way. In fact, many planters came to oppose controls if the purpose was a stronger currency which was contrary to their interests. So, the government was increasingly protecting an industry not entirely on board with the policy. In any case though, prices stayed high after 1924, always over 13.5 cents per pound in New York.

The controls did not mean there was no growth in coffee output; coffee production kept growing. There was more production from smallholders in frontier regions and production in other countries increased as high prices encouraged new competitors to enter the market. Meanwhile, Brazilian production remained labor intensive as government support for planters discouraged investment in labor saving technologies.

The prosperous conditions for planters, supportive of a complacent posture, would not outlast the 1920s. Prices slid late in 1929. This did not immediately lead to production cuts. The land and labor employed in growing coffee could not be easily redirected elsewhere; because of the time needed to raise coffee trees, farmers could not pivot without recognizing a large loss. Brazil’s government devalued its currency to remain competitive but this made the cost of servicing its own debts higher. With output remaining too high, U.S. wholesale prices fell back below 10 cents per pound in 1931; in fact, prices even got below 6 cents, a level not seen since decades earlier.

In the end, the coffee policy’s effect was to diminish Brazil’s nearly-monopolistic position in the coffee trade and weaken its fiscal position. Brazil’s share of U.S. coffee imports, for example, fell to about 70% in 1930, to 60% by 1940, and perhaps around 54% in 1950. Also, the foreign loans used to acquire surplus coffee inventories were of little value to the country’s future. The need to keep the coffee industry competitive and the weakened fiscal condition prompted Brazil to devalue its currency. Inflation rose and public debt grew over the early-20th century.

Lesson

Brazil’s coffee market intervention may have supported planters in 1906-07 but the actions proved fiscally disadvantageous. So too did the country’s competitive devaluations. In a way, Brazil was not the monopolistic producer it may have seemed because control of the industry in Brazil was fractured and, thus, state involvement was crucial to controlling the market. But, the interests of planters and state were entangled in such a way that support for unprofitable planters damaged public finances, and ultimately the coffee industry itself. Yet, intervention seemed advantageous in the short run.

More from the Tontine Coffee-House

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