Gertrud Lovasy’s journal article in International Monetary Fund Staff Papers examines the coffee market’s transition from the prolonged scarcity and high prices of the 1950s to persistent surplus. Prepared in September 1961 and updated before publication in July 1962, it combines a survey of production, trade, and prices with a quantitative assessment of adjustment costs and a comparison of international policy instruments. Its central distinction is between restoring a sustainable production balance and protecting exporting countries’ earnings while that adjustment proceeds. Export quotas offer the most practicable interim arrangement, but only if accompanied by enforceable reductions in output.
Lovasy explains the coffee cycle through the interaction of relatively stable demand and slow-moving supply. Consumption grows principally with population and income, reacts little to price changes, and varies only slightly with business conditions. Coffee trees, meanwhile, take years to bear and remain productive for decades. High prices therefore encourage planting whose consequences emerge only after the incentive has generated excessive capacity; falling prices cannot quickly reverse this expansion.
The scaling down of current production in response to reduced prices is confined, as a rule, to lessened care, or abandonment, of older plantations, and is not sufficient to bring output into line with demand.
This biological lag makes the surplus structural rather than a temporary trading disturbance. Lovasy also distinguishes production from supplies actually offered on the market: withholding, stockpiling, and destruction can support prices without correcting productive capacity. Her production figures refer to exportable output, excluding domestic consumption in producing countries.
The empirical survey shows both the scale and uneven distribution of expansion. Average exportable production rose from 32.6 million bags in 1951–55 to 56.9 million in 1959–61, while exports increased much less. Brazil and Africa nearly doubled production; other Western Hemisphere producers expanded more moderately. These differences matter because coffee is a differentiated commodity. Latin American milds command a premium over Brazilian varieties, while African robustas generally sell at a discount. Cheaper robustas gained demand partly through their suitability for soluble coffee, but price reductions for Brazilian coffee could reverse that substitution.
Existing agreements distributed restraint unequally. Brazil withheld especially large quantities, supporting prices while allowing other producers to expand sales. African participation subsequently widened, but competition from nonmembers and shifts toward Brazilian coffee continued to depress robusta prices. Lovasy thus treats international cooperation as a problem of allocating adjustment burdens, not simply fixing an aggregate price. Export earnings fell by nearly 20 per cent between 1957 and 1960 despite increased export volume. Yet taxes and low payments for stockpiled coffee had not made production generally unprofitable, and planting continued in some areas.
Her prospective calculation places average annual exportable production near 60 million bags over the next five or six years, against average import demand of approximately 46.5 million bags in 1961–66 at existing prices. Natural consumption growth would not absorb output rapidly enough.
The final solution can consist only in restoring, and in the longer run maintaining, a reasonable balance between demand and supply.
Lovasy tests the alternative of clearing the surplus through lower prices to establish its economic cost, not to recommend it. With demand elasticities of −0.2 or −0.3, absorbing 60 million bags would require price reductions of roughly 72 or 57 per cent. Relative to 1960, annual export receipts could fall by more than $1 billion or about $740 million. These are explicitly rough estimates: elasticities derived from smaller historical price changes may not hold under drastic reductions. Stable American per-capita consumption despite falling prices, alongside expanding European imports, further cautions against treating demand responses as uniform.
Nor would abolishing importing countries’ coffee taxes solve the imbalance. The cited estimates imply additional demand equal to only about one tenth of expected surpluses. Production must therefore contract through lower producer returns, planting controls, abandonment of capacity, and alternative land uses. Continuing to withhold output would waste land and labor while accumulating costly stocks whose presence itself undermines price support.
The policy comparison evaluates adjustment incentives, transitional income protection, financial burdens, and political acceptability. Free markets combined with compensatory grants would allow low prices to encourage contraction while preserving foreign-exchange receipts and funding resource diversion. Lovasy recognizes the economic advantages but doubts that importing countries would commit sufficiently large tax revenues or aid funds. Buffer stocks cannot address persistent excess production. Long-term purchase contracts face a different obstacle: importers would resist guaranteeing substantial purchases at minimum prices when cheaper supplies remained available, while the residual market would still generate depressed prices and accumulating stocks.
An agreement based on export quotas has the advantage of comparative simplicity, since it could be built on existing arrangements among producing countries, which now cover roughly 90 per cent of total exports.
Importing-country participation could strengthen these arrangements by restricting purchases from nonmembers. But administrative feasibility does not make quotas self-correcting:
In contrast to the schemes discussed above, quota agreements per se offer no price disincentive to producers.
Lovasy accordingly proposes gradually declining supported prices, explicit output-reduction obligations, forward quotas indicating sustainable production, and limits on stocks. Excess production might initially require large-scale destruction. Governments would bear substantial conversion costs, potentially financed by the gap between market prices and producer returns. The closing update reports negotiations toward an agreement incorporating quotas, production controls, stock limits, and consumption promotion. The article’s enduring analytical contribution is its insistence that supporting export income must facilitate structural adjustment rather than perpetuate the surplus that makes support necessary.
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