The International Coffee Organization: How the Cuban Missile Crisis Saved Coffee
The Organization of Petroleum Exporting Countries (OPEC) is a body founded in 1961 by Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. Since their founding they’ve been joined by a half dozen or so other nations.
Together these countries hold eighty percent of the world’s petroleum reserves and account for forty percent of its production.
The goal of this organization is to ensure stability within oil prices, attempting to keep the global rate at around $70–80 per barrel. A goal which has been met with mixed success over the years.
OPEC is a name that is common on the news, especially during discussions on gas prices. And while they may not be a household name, surely most people know of them to some capacity. Even if that’s just to complain about how expensive a litre is at the pumps.
This article is not about OPEC. Instead, it’s about an organization of 52 nations that operated throughout the 1960s, 70s, and 80s. An organization, which at its height, controlled 95% of the world’s coffee market and dictated the price on this commodity. An organization that was seen as a bulwark against bolshevism in Latin America and as an enemy to US consumers.
This article is on the International Coffee Organization.
Before the International Coffee Organization
Our story starts with the tale of two nations: The United States of America and Brazil.
Coffee and the United States are a narrative which is intertwined. The US’ obsession with coffee can date back to the Revolutionary War when patriots proposed that it was ‘un-American’ to drink tea. Led by merchants in Boston and New York, there was a move to make coffee the American beverage of choice. A movement which was overwhelmingly successful.
By the Civil War, Union soldiers would receive a daily ration of 1/10 of a lb of raw green coffee beans (or about 36 lbs per year). And even today, 54% of Americans claim that they drink at least one cup of coffee a day.
It is the world’s second most traded commodity (only behind petroleum, funnily enough) and is a multi-billion-dollar industry which employs tens of millions of people throughout the world.
The popularity of this beverage would only grow and rapidly the US ascended to being the largest market for coffee in the world, importing twice as much as the 2nd largest importer. This demand for the beverage, within America, was instrumental, determining the global price for the commodity.
Unfortunately, Americans were incredibly stingy when it came to how much they were willing to pay for coffee. Consumers demanded price control measures and during the late-19th and early-20th centuries this would drive down the price of the beverage to such a point that nations would stop exporting to the United States, due to it being unprofitable.
Still there was an ethos within the nation more potent than life, liberty, and freedom. This was the inability of the US consumer to imagine spending more than 5 cents on a cup of coffee. You may think I’m exaggerating but during the Second World War, there would be boycotts and violence against restaurants that dared break into the realm of 7 cents a cup.
Where America may be the biggest importer of coffee in the world, Brazil is its largest exporter.
They have a climate which is ideally suited to the production of coffee, meaning that many people are willing to make the intense investments of both capital and time to cultivate this lucrative export. Coffee is big business in Brazil, and at the time of the International Coffee Organization’s (ICO) founding, they would account for 50% of global production (second place was Colombia at 11%).
Brazil is so important to coffee that even the rumours of frost in Brazil (which can decimate a year’s crop) can lead to massive fluctuations in its price.
Though coffee is obviously important to all of Latin America. The region is home to many nations which are dependent on export revenues to meet government spending and coffee alone accounts for 25% of all export revenues.
Coffee is so important that even a single cent fluctuation in the price of coffee (per lb) can lead to $50 million of wealth being either added or stripped away from coffee producing nations.
Due to the importance of coffee to the Brazilian economy, it shouldn’t be surprising that the earliest attempts at influencing the price of this commodity would appear here.
In 1923, Brazil attempted to put in place a policy to control the price of coffee. At the time, they held 60% of the world’s supply. By putting in place export quotas and controlling the flow of the product out of the country, they were initially met with some success, raising coffee prices.
Though by 1929, this policy would fall apart.
To understand why this happened we briefly need to discuss the economics behind coffee.
Unlike with a lot of other commodities, coffee is an investment that takes a long time to pay off. Firstly, there are steep costs associated with clearing land and planting the trees. On top of this, coffee trees take 3–5 years before they start to produce cherries (which the beans come from) and can take upwards of 12 years before they reach maximum productivity.
So, what we often see with coffee prices is that prices will start to rise (either due to a shortage or market manipulation) and many prospective producers will invest in setting up coffee plantations of their own. Because of this, the supply of coffee will grow greatly within 3–5 years time, drastically tanking the price, thus putting many producers into a destitute position on their investments.
So, with this in mind, we can discuss the four reasons that Brazil’s first attempt failed:
- In 1927 and 1929, there were massive bumper crops of coffee, greatly increasing supply beyond what the quota system would allow for. This got so bad that the Brazilian government would stockpile and even destroy coffee stocks to maintain prices.
- The artificially high price of coffee, early on, led to many investors attempting to capitalize upon the rising price of coffee. This increased supply greatly within 3–5 years time and was compounded even more by issue one.
- This heightened supply of coffee (from issue one and two) was starting to drive down prices, hurting many producers who started to pressure the government into lifting export restrictions.
- The other producing nations were not engaged in this scheme, meaning they could undercut Brazilian producers by selling at a lower rate. This also led to an erosion of Brazil’s market share as other nations boosted their own productivity to meet demand for coffee from importers hesitant to buy at Brazil’s heightened rates (hence why Brazil dropped from 60% of production in 1923, to 50% by 1962).
The next attempt to regulate the price of coffee would happen in 1940 with the International Coffee Agreement (ICoA) which included all major coffee producers and the United States of America. It employed a system of import and export quotas to regulate and stabilize the price of coffee.
This however was viewed as an emergency war measure as Latin American export revenues were left devastated by the war (since they could not ship products safely to Europe). Besides this, the United States was hesitant to enter into any agreement that would impact the price of coffee.
A view that would take something truly apocalyptic to change.
Leading to the ICO and Formation
Before we progress with our narrative, I just need to briefly discuss how much of a political issue the price of coffee was in the United States. As previously mentioned, there was legitimate violence at restaurants who raised prices to 7 cents a cup and this kind of attitude extended to political activism.
The rising price of coffee in the early 1950s, led to two Congressional Investigations in 1950 and 1954 and would see the United States remove its war time coffee quota system (under the ICoA) in 1953.
What this implanted within the minds of Congress was a wariness amongst them to alienate coffee-consuming voters, as the price was seen as something that provoked an especially volatile and negative response.
Another key piece to pick out of this statement, however, was that coffee prices were rising in the early post-war years. This was not helped by a frost in coffee producing regions in 1954 which led to even higher prices.
Now, why are high coffee prices troubling?
Let’s turn back to Brazil in the 1920s.
Oh right, higher prices lead to more investors investing in coffee production. And production did rise. Between 1957–66, the exportable production of green coffee beans rose by 38%. It grew so quickly, that even by 1960, there was a crash in the price of coffee. By 1962, the price of coffee was half of what it was in 1954.
This led to a need for another International Coffee Agreement.
In 1959, the Latin-American Coffee Agreement was formed which included all the nations of the ICoA (including the United States) and new nations such as France and Portugal (with their own coffee producing colonies). They were joined in 1960 by the British (and what remained of their coffee producing colonies).
These nations wanted to implement a voluntary quota system in the hopes of keeping coffee prices both elevated and stable. The stability was seen as a means of stopping this boom-bust cycle, in terms of prices and production, while higher prices were seen as a means of sending indirect foreign aid and investment to Latin America.
However, the United States was firmly against this agreement. During the 88th Congress of the United States, this issue was debated extensively and congress was especially sensitive to their coffee-drinking constituents.
One memorable quote that I love from these debates was:
“it seems ridiculous for Congress to sanction agreements which could victimize the American household”.
Or when Missouri Congressman Thomas Curtis equated the prospective agreement as tantamount to “economic violence.”
As you can see, there was much resistance to this agreement in the United States.
What changed to make it palatable to the coffee-drinking public?
January 1st, 1959
The city of Havana fell to members of the 26th of July Movement, marking the end of the Batista government and the start of Castro’s.
October 16th — October 29th, 1962
The Cuban Missile Crisis unfolds, as the world comes the closest to nuclear war as it ever has or ever will. Missiles are assembled on the island within striking range of the continental United States.
Told you it would take something apocalyptic to make the US change its mind.
Within three years, the threat of communism reached the western hemisphere and had become a very real threat. Overnight, the United States started to shift its foreign policy, funneling money and assets into propping up anti-leftist regimes in the hemisphere.
And coffee became central to this policy.
The potential coffee agreement shifted from being economic violence to the American household to being a means of funneling foreign aid into Latin American countries. Within American minds, the price of coffee was seen less as alienating consumers and more as a tool for fighting communism. As I think these following quotes will prove:
“This agreement is so great a contribution to international stability and international peace and to the anti-Communist struggle, that we must wonder why it is opposed” — Senator Jacob Javits, New York
“We are attempting to get an agreement on coffee because if we don’t get an agreement on coffee, we’re going to find an increasingly dangerous situation in the coffee producing countries, and on which would threaten the security of the entire hemisphere” — President John Kennedy
“If the only alternative for the people of Latin America are the status quo and Communism, they will inevitably choose Communism” — President John Kennedy
So, in 1962, the International Coffee Organization was formed. It was a coalition of exporters and importers that accounted for 95% of the world’s coffee market.
Initially, this organization met much success, as there was a great level of cooperation between member states. This would lead to market stability and heightened prices. It also met its goal of transferring a considerable amount of wealth from the importers of the developed world to developing exporters.
Still the organization was plagued by a couple of issues that caused tension between members.
First, there was an incentive amongst smaller members to cheat the system. This was because their production was small enough that they wouldn’t negatively affect the market prices (unlike if Brazil or Columbia were to break their quotas). They were also allowed to get away with cheating the system as the organization was very forgiving towards rule violations.
Second, nations could also get around their quota limitations by funneling their beans through third party nations to increase their shares. An example would be Haiti selling beans to Venezuela who would package them as Venezuelan beans and sell them to the United States. This created another route for members to cheat the system.
Third was the frequent sale of beans at below quota prices to importing nations outside of the agreement (such as the communist countries of Eastern Europe). This one would prove especially sensitive to the importing members of the ICO.
The ICO Falters and Falls
By 1968, support for the ICO was beginning to erode within the coffee consuming nations of the world. In the United States, the National Coffee Association (a body that advocated for coffee consumers) and a coalition of major roasters, who until this point were generally supportive of the organization’s philosophy of foreign aid, were beginning to exert domestic political pressure to return coffee to its pre-ICO dynamic.
This worry about price control was not an exclusively US problem and between 1968–1972 the relationships established between producers and consumers over the price of coffee began to fall apart.
Attempts were made to alter the ICO in 1976 and 1983 but were met with limited success. While they managed to retain some stability within the price of coffee, and attempted to implement advanced techniques aimed at manipulating prices, these solutions were a far cry from the golden days of 1962–68.
Throughout the 1970s and 80’s, the US would experience a growing disapproval of the ICO, believing that the organization artificially maintained high coffee prices (which was the point) and that producing countries were avoiding their quotas by selling to non-member states at below market values.
In 1986, these tensions would come to a head as producing countries intensified their limitations on exports, further driving up costs for importers.
The final nail in the ICO’s coffin would come three years later, in 1989. The Berlin Wall was falling, the eastern block dissolving, and within two years, the USSR would cease to exist. The threat of communism was removed from the American public’s mind.
There was no longer the threat of a regime falling in Central America or another Caribbean island becoming like Cuba. And just like that, the ICO lost its main political clout within the US. Congress immediately jumped on this as they no longer saw a reason to punish consumers with high coffee prices any longer.
In 1989, the ICO members were set to renew their obligations to the organization and the coffee world was rocked when the US decided to allow their obligations to expire with no plans for renewal.
The loss of the world’s largest importing nation was a fatal blow to the organization, leading to a collapse of the quota system and a rapid decline in the price of coffee. Between 1989 and 1990, the price of coffee would drop from $1.20 per lb to $0.85 per lb, devastating Latin American economies.
The continued decline in prices (down to $0.51 per lb in mid-1992) led to increasing pressure within producing nations to salvage some form of coffee agreement. Concessions were made by producers, including the elimination of sales to non-member states, but still an agreement failed to come together.
This was due to two main reasons:
- A difficulty in reaching a concession between 52 producing nations.
- Reluctance of importers, chiefly the US, to return to price control measures.
And with that, came the essential death of the ICO. While the organization remains alive, even to this day, it is no longer the bulwark of price control that it once was. Nowadays it’s merely an advisory council, used to direct investment and help shape domestic export policies.
As I sit here, enjoying a cup of coffee at nine o’clock on a Tuesday morning, I join the millions of coffee consumers around the globe who benefit from low coffee prices.
Yet, as this article has shown, coffee is an important resource to many nations within Latin America, Africa, and Southeast Asia. It is the second most traded commodity in the world after oil.
And like oil, with OPEC, coffee attempted to establish a resource cartel to manage its prices and attempt to gain additional profits from the developed nations who import it.
For a brief period between 1962–1968, this cartel led to an influx of capital being sent to coffee producing regions of the world. This was done in the name of foreign aid and fighting communism. But no matter the crusade, it can’t be denied that high prices helped these nations.
Though this brief golden age was almost immediately followed by a prolonged death, as infighting withered away the organization, only for the fall of communism to finally wipe it out.
This has been the tragic story of the International Coffee Organization.
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