Coffee "Valorization" in Brazil Author(s): Lincoln Hutchinson Source: The Quarterly Journal of Economics, Vol. 23, No.

3 (May, 1909), pp. 528-535 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/1884777 . Accessed: 18/07/2013 19:17
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COFFEE

"VALORIZATION"

IN BRAZIL.

To understandthe coffeesituation in Brazil, one must bear in mind the main featuresof the growthof the indushas been the chiefexportproduct, try. For decades, coffee and has dominatedthe world marketfor that commodity. of the world's supply now Three-quartersto four-fifths comes fromthreeStates of this one country. fertile Rapidly increasingworld demand,' a wonderfully soil, and cheap labor2 kept the industry in a flourishing conditiondown nearly to the close of the imperialr6gime in 1889. Afterthe abolition of slavery and the establishment of the Republic, several factorscontributedto prolong the prosperity. World demand continuedto increase, virginsoil was still available, immigration supplied labor, and Brazilian currency was fallingin gold value.3 The inevitable happened. Easy profitsled to increased investments and careless methods. Little effort was made to cultivate intensively. Hand labor in cultivating,picking, washing, drying,hulling, polishing,sorting,packing, loading, remainedin vogue, and plantersfell into a luxurious absenteeismin the capital or in Paris. The time came, about the beginning of the new century, when conditionschanged. Supply passed demand,formidable surplusstocksbegan to appear, prices,whichhad long been declining, fellto or below cost of production,4 Brazilian
1 For instance, consumptionin the Umted States increased from220,000 tons in 1880 to 245,000 in 1890 and 487,000 in 1907
2 Slavery was not abolished until 1886 3The fluctuationsof Brazilhan exchange have been a noteworthybut often in the coffee overlooked influence industry The crop is chieflysold abroad It is paid forin gold equivalents, wlhle the expendituresof the planter are in milrels Fallng exchange gives the planter increasing returns in imlreis, while cost of hving, and consequentlywages, remain unchanged or rise but slowly This was the condition from1890 to 1900, and in spite of declning prices of coffeethe industrycontinuedto prosper,and the planter to live in a fool's paradise

The cost of production of coffeedelvered in New York, in 1906, was estimated at $16 36 per bag The market price was about $10

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COFFEE "VALORIZATION"

IN BRAZIL

529

exchange reached bottom and began to rise rapidly1 The conditions of the nineties were reversed,and planters ones began to turnto the banks for aid A few far-seeing realized that the real remedylay in the introductionof methods which should reduce the absurdly high cost of production,but they were unable to turnthe tide. When bank assistance failed, demand was made for artificial further checkingof supply,and the government prohibited planting. But results were small. The law was evaded to some extent; but, even if obeyed,it would have failed, for the improved methods employed by the few saner of treesset out during planters,and the comingto maturity the precedingdecade, continuedto augmentthe crops. The threecoffee States have long been the thiefeconomic and political centresof Brazil. Especially is this true of Sao Paulo, and Sao Paulo was the chiefsufferer in the coffee is almost its sole industry.2 Condicrisis. Coffee-raising tions demanded either reformin methods of production, forthe weakerplanters, withbankruptcy or further government assistance. The latter was the easier solution,and it was a political possibility. Sobererviews mightstill have prevailed but for a new danger-the "bumper" crop of 1906-07. Brazilian production had risen slowly from 9,500,000bags in 1899-1900to 11,300,000 bags in 1905-06. Then it suddenlyjumped to 20,000,000at a timewhenthere was alreadya surplusstock on the marketofsome 4,000,000 of the wiserminorbags. Small wonderthat the warnings ity were unheeded, and that the coffee States, led by Sao Paulo, launched theirvalorizationplan., By this plan the States of Sao Paulo, Minas Geraes, and Rio de Janeiroagreedto purchaseand hold forbetterprices to keep out of the marketall but a quantity enough coffee to supplythe worlddemand,whichwas estimated sufficient
1 In 1899 the milrelswas worth less than 6d in 1905 it passed 17d Since then therehas been some dechne,and itils now somewhatabove 15d. The government has adopted a "Conversion Law" which now preventsits falhng below 15d. 2 Sao Paulo produces 60 per cent. of the total Brazihan crop, and this one commodityconstitutesover 98 per cent. of the State's exports.

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530

QUARTERLY JOURNAL OF ECONOMICS

at 17,000,000 bags. Feeling that Brazil held a virtual monopolyof the trade, the advocates of the scheme maintained that this withdrawal of excess supply would at once forceprices up to the minimumfixedby the governmentsas the basis fortheirpurchasesor subsequent sales. This price was to be from32 to 35 milreis per bag 1 for Santos grade No. 7, with other grades in proportion. It was determinedby an estimate of "reasonable profit"at existingcost of production. Funds forthe purchasewereto be raised by a 15,000,000 loan on the credit of the States. Interest,amortization, and otherchargeswere to be provided for by a surtax on coffee exportsof 3 francsper bag. Difficulties immediately appeared. Capital was loath to back the scheme,and the loan could not be placed without federalguarantee,and this the federalgovernment declined to give. Sao Paulo's two co-operating States grew timid and withdrew. The plan mustbe abandoned or Sao Paulo must act alone. This the State decided to do. It began operationsby the issue of treasurybills for 1,000,000.2 With the proceeds it purchasedcoffee and used this as the basis for loans the service of which was to be met by the surtax of 3 francs per bag. Rio de Janeiroand Minas Geraes supportedthe plan to the extent of imposing a similar tax, but they purchases. apparentlytook no part in the coffee Sao Paulo also succeeded in placing loans of 1,000,000 with the BrasilianischeBank fur Deutschland (soon afterwards redeemed,however), 3,000,000 with the federal and later 3,000,000with Schroeder& Co. of government, London, and the National City Bank of New York.3 By the end of 1907 Sao Paulo had borrowed some $88,400,000,and had purchased, at rates about $1.22 per
1To be raasedgradually,in subsequent years, to 40 milreis 2 16,060,422 milrels 3 Of the total loans, 3,200,000 is said to have been suppled by ten large coffeehouses of Europe and the Umted States See London Economist, August 22, 1908

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COFFEE "VALORIZATION" IN BRAZIL

531

bag (of 132 pounds) above the marketprice,8,357,500bags of coffee.1 But prices failed to rise. In fact, they fell stock inslightly. The existence of the huge government duced conservation among dealers. Possibly, too, there were thrown on the market stocks which had been previously hoarded in anticipationof valorization.2 The proceeds of the surtax3 were insufficient to provide safelyfor etc. Attempts interest, amortization, storage,commissions, to dispose of portionsof government holdings threatened further to demoralizethe market. Creditors grew nervous and began to demand theirmoney. Sao Paulo founditself unable to raise furtherfunds on coffeecollateral. Purchases had to be suspended, and valorization may be said to have come to an end by the beginning of 1908. The resultsof the experiment were yet to be faced, however. Sao Paulo had incurreda heavy debt in the interest of the plan, and the State found itselfthe possessor of a forwhich it had paid at rates considhuge stock of coffee erably above the market. World supplies continuedto be about equal to world demand, in spite of a decline in the 4 Creditors were Brazilian cropto morenormalproportions forliquidation. clamoring The only escape from bankruptcyseemed to lie in a of the government obligations and a definite refinancing plan for realizing on the coffeeholdings,and nearly the entire year 1908 was spent in negotiations having this end in view. These recently (December, 1908) reached a successfulissue, but only after the federal government had come to the assistance of the State by grantingan unqualifiedguarantee of a new loan of 15,000,000to be used to refundthe earlierobligations.
1 This stock was held at various European and Americanports (except 657,500 bags at Santos) as securityforthe loans
2 Valorization had been in the air two years, at least, before the plan was put into operation

The proceeds for the thirteenmonths, December 1, 1906, to December 31, 1907, were $7,112,475 aThe crop of 1907-08 was 11,000,000 bags

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532

QUARTERLY JOURNAL OF ECONOMICS

The essentialfeaturesof this loan and the contractwhich accompaniesit are:1. The federalgovernment indorses it with an unqualifiedguarantee. 2. The Sao Paulo coffeeholdings, amounting now to 6,994,420 bags,' are warehoused in New York and seven European ports,and warrantsforthem are deposited with whichact as trustees forthe bondholders. banks,2 specific is placed under the sole controlof a com3. This coffee mitteeof seven residentsof the United States or Europe,3 who are given full power over its liquidation,saving only a provisoas to minimum sales duringthe next ten or eleven years.4 4. The State of Sao Paulo raises the surtax from3 to 5 francs per bag, and guarantees the application of the proceeds to the sole purpose of satisfyingthe interest, amortization, etc., of the loan. 5. The State likewise agrees to restrict exports to 9,000,000 bags for 1908-09, 9,500,000 bags for 1909-10, and 10,000,000for succeedingyears. The placing of this loan marks the officialend of the In summing up the generalresults,one mustbear in mind both the State government and the planters. The credit of the State has suffered severely. No proofof this statement is needed beyond the fact of the extreme difficulty in raisingthe finalloan and the insistenceof the financial world that federal guarantee must be secured. Prior to 1906 the abilityof Sao Paulo to meet its obligationsseems
1Durng the past six or eightmonths the State, in spite of repeated promises to the contrary,has sold sub rosa about 1,300,000 bags out of its holdings
2 Messrs Schroeder& Co and two French banks.

valorization experiment.5

3 Four to be nominated by Schroeder & Co., two by the Socliet G6nerale, and one by the Brazihan government.
4 At least 500,000 bags must be sold in the six monthsfrom Januaryto June, 1910, 600,000 in the firsthalf-year1911, 700,000 in 1912 and subsequent years until stock is exhausted.

5 For full details of the loan see the Economist, December 12 and 19, 1908; United States Consular Reports, December, 1908, pp. 140-144.

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COFFEE

" VALORIZATION"

IN

BRAZIL

533

to have been unquestioned, and it was borrowingfreely for many sorts of permanentimprovements. The direct financial loss, tho extremely difficultto estimate, has in all probability reached a sum of several millions of The resultsto the planter are somewhat clearer. Those whose coffee the government purchasedundoubtedlyreaped a financialbenefit. This benefitwas not, however,equal to the excess of price over the market price, for a large part of the surtax on export must be deducted.2 Other planterssuffered to the extent of all that portion of the surtax which they were unable to shift,but, on the other hand, they, in common with all sellers, profitedby the steadyingof prices due to government purchases. The enormous crop of 1906-07 would unquestionably have demoralized prices,had not the State, or some one else, undertaken to hold the surplus.3 From whatever benethus produced,must, however,be deducted the ficialeffect
1The State incurred obligations amounting to a total of 310,000,000 milreis, reduced later by redemption of one loan of 13,500,000 milreis and the sale of 1,300,000 bags of coffeefor an amount which was probably about 39,000,000 milreis, thus leaving due, before the recent settlement,257,500,000 milreis. All which have now been the State had to show for this was 6,994,420 bags of coffee, pledged for the loan of 15,000,000. This was negotiated on terms netting the governmentabout 12,500,000, or approximately200,000,000 milreis. This coffee is, however, said to be worth to-day about 216,000,000 milreis. So that, if liquidation could take place now, the net financial loss would be in the neighborhood of 41,500,000 milreis, or $12,450,000. This must be regarded only as a rough estimate, however, for the published accounts are confusingand to some extent contradictory. Consul-General G. E. Anderson places it as high as $30,000,000. See United States MonthlyConsular Reports, December, 1908, p. 144.
2 In the prevailing condition of the market, with surplus production and the governmentstock constantly threateningthe trade, the surtax could not readily be shifted. The planter probably paid most of it. As the export tax was sixty cents per bag and the price premium about one dollar and twenty cents. the planter gained at least sixty cents per bag.

dollars.L

3Comparisonwithprevious "bumper" crop conditions abundantly proves this. 1896-97 and 1897-98 were both big crop years, the production increasing from 6,000,000 bags in 1895-96 to 11,000,000 in 1897-98. Prices declined in the same period from160 to 85 (London Economist's index number). Similarly,production jumped from9,500,000 bags in 1899-1900, to 15,500,000 in 1901-02, and prices fell from85 to 73. But in 1905-06 and 1906-07 an increase in production from 11,300,000 bags to eighteen or twentymillion caused only a nominal fall in price from87 to 85. Some of this steadying effect may have been due to a shiftingof a portion of the surtax, but probably not much, for reasons already stated.

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534

QUARTERLY JOURNAL OF ECONOMICS

loss occasioned by the prevention of reactionaryrise in price such as had always before followed periods of depression. There was yet anotherresultto the planters,-one which must,in the end, benefitthe entireindustry. The governin its purchases to the ment's policy of giving preference better grades of coffee, stimulated efforts, already begun, to introduce improved methods. It is stated, doubtless with considerableexaggeration,that morewas done in this directionin twelve or thirteen monthsthan could otherwise have been looked forin as many years.1 There still remain some knottyproblemsto solve before can be known. interference the finalresultsof government The disposal of the surplus stock without too great disturbance to the market, yet rapidly enough to prevent or disproportionate deterioration storageand othercharges, and the promiseof the State government to restrict exportation in spite of increasingcrops,2present problems still full of menace to the industry. The placing of an import by the United States would ease the finanduty on coffee cial situation considerablyby enabling the trusteesto disat a profit, but pose of theiraccumulationsin this country3 of the planters and it would only increase the difficulties the Sao Paulo government. The whole experienceserves to emphasize the dangersof interference with industry. The State of Sao government Paulo came to the rescueof its plantersin a situationwhich the latter had created by their own short-sightedness. Possibly such action may be partly justifiedin view of the vast importanceto the State of that particularindustry. Possibly,too, it may be said to have been partlysuccessful, provided the problems still remainingbe solved without it has been disaster. Yet, even if partlysuccessful, further loss State and to the so only at large direct Government,
1 Economist, September 19, 1908. There is strongprobabilitythat the crops will exceed the maximum export allowed by the contract.
2 x Said

to be some 4,000,000 bags.

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COFFEE "VALORIZATION" IN BRAZIL

535

of its credit,and has encouraged proserious impairment aid rather than their own ducers to rely on government will not efforts. It is safe to say that the coffee industry resume a normal and thoroughly satisfactorycondition untilthe plantersresolveto stand on theirown feet. This will involve the introductionof better methods all along the line,the closerwatchingof costs of production, willingness to accept low profits comparedwith those of ten or fifteenyears ago, and the elimination of the weaker producers.
LINCOLN HUTCHINSON.
UNIVERSITYOF CALIFORNIA.

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