The International Coffee Organzation

Steve GSeptember 12th, 2007
By: Steve G

(Page 4 of 5)

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ICO Logo

The International Coffee Organization (ICO) was established for the sole purpose of assigning quotas of coffee production and consumption. Unlike the IBC, which used subterfuge and deception to control prices, the ICO worked openly as a mediator between producers and consumers. The ICO took the needs of both into consideration when it set quotas. It also helped set guidelines if there was an excess of coffee. There were three viable options: the product was kept off the market, destroyed, or sold to countries not associated with the ICA (Most countries that were not aligned with the US were not part of the ICA, such as the Soviet Union.).

Every few years, the ICA would be renewed by vote. For the agreement to be renewed, the three pivotal partners had to concur. Voting power in the ICA was correlated to market share. As expected Brazil, Colombia and the US, had considerable power. As long as the “big three” were in agreement, the pact of the ICA would continue. Though stable, the ICA still had some significant flaws that would eventually hurt the industry.

Prices remained reasonably stable and high through the ICA, but smaller Third World countries were starting to feel the short end of the stick. Other developing countries (such as Indonesia, Ethiopia, and parts of Central America), used coffee production as a means of economic development. Countries, such as Brazil and Colombia, were given large quotas while smaller nations were assigned very little. When time came for these smaller nations to reap the rewards of their efforts, the ICA first true flaw became very apparent.

With so much supply and no one to sell to, a new dilemma was born from the ICA. Many Third World nations were sitting on huge caches of coffee with a limited amount to sell to the US and Western Europe. The most logical choice was to sell to the Soviet Union, but it came with a small catch. USSR would only purchase beans at drastically lower market price. To offset the loss from selling to the USSR, these smaller countries were raised production and trade. As more countries began selling to the Russia, Americans had raised fears of Communism spreading into the other Central and South American countries. During the Cold War, the best way to fight this issue was to reward countries with more lucrative trade incentives. Offering better prices for their coffee was a sure-fire way to stem the spread of Communism, but one wall stopped them from doing it: the ICA. During the next renewal of the ICA, the US needed to demand something that would give them a legitimate out. Arabica beans became that out.

At the time, robusta coffee was the main import of coffee bean. It was cheap and easier to grow, thus sellers pushed more of it into the market. Most of the coffee that people drank back then is considered horrible today. Arabica beans are higher quality, but required a very stringent environment to grow, thus lower in production. At the next meeting of the ICA, the US demanded a higher increase in the quota for arabica beans. They knew no could fulfill the request and US could justify backing out of the agreement. To further aggravate the ICA, the US also sent in a delegation of economists that called for a free market. The shift in preference from robusta to arabica was not started due to quality, but rather because of political means. With one of its crucial legs gone, the ICA and ICO was broken. This caused a huge implosion of the market, starting the modern age of coffee trading. Economists got their free market, but the results were dire.

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