For Coffee Traders, Disaster Comes in Pairs October 28, 2001 By ANTHONY DePALMA

ONLY days after the World Trade Center collapsed on top of the evacuated New York Coffee Exchange, obliterating the most important coffee auction in the Western Hemisphere, traders moved into backup office space across the East River and quickly put the exchange back in business.

At first, all was not well. Trading was limited to just 90 minutes, and the low ceilings in the building that is the exchange's temporary headquarters make the trading pits as noisy as the elevated subway that rumbles overhead in Long Island City, Queens. But order was restored with impressive speed, and contracts for most of the $18 billion of coffee consumed annually in the United States were bought and sold at the same volume as before.

Trying as it was, responding to the crisis in the coffee exchange may have been the easy part of handling the crisis in coffee.

The price of raw coffee ‹ in decline for several years ‹ plummeted to a record low last week. The fall has been dizzying. Futures contracts on the coffee exchange, the benchmark for prices around the world, had been as high as $3.05 a pound, in May 1997. But last Monday, they bottomed out at 42.5 cents a pound, then rose slightly. And the future looks no brighter.

Bountiful rainfall in coffee-growing regions of South America is expected to help produce a record coffee harvest of more than 44 million bags next year in Brazil, the largest coffee-growing country in the world. Each bag weighs 132 pounds.

The emergence of Vietnam as a major coffee producer contributes to the oversupply. The Vietnamese government has helped farmers in the central highlands plant coffee trees by the thousands. A minor coffee exporter just a decade ago, Vietnam will swamp the market with 12 million bags of generally low-quality coffee this year, which could drive prices to new lows.

"Coffee is dead," said Dov Blumenthal, a trader whose pit name on the trading floor of the coffee exchange is Bear. He said the absence of frost, floods or other natural disasters in South America, good news for the people there, spells disaster for the oversupplied coffee industry. "I've never seen things as bad as this," he said.

And the glut could prolong the boom-bust cycle that has haunted coffee for decades. As prices fall, farmers stop fertilizing and pruning trees. Eventually, they may yank out trees, reducing future supply. An unexpected frost or hurricane could wipe out the crop, causing shortages that would push prices sharply higher.

FOR now though, crumbling prices are causing havoc in the coffee-producing countries, which are on the verge of shutting down the cartel they formed a few years ago to control supplies and support prices. The impact on countries like Nicaragua and Ivory Coast has been devastating, as many farmers sell coffee at less than the cost of production. Some have to choose between starvation and switching to other crops, including illicit harvests like coca.

To the dismay of American consumers, the price collapse has not made its way to supermarket shelves. Prices for the most familiar brands ‹ including Folgers, Maxwell House, Chock Full O' Nuts and Nescafé ‹ which account for more than 65 percent of the retail market in the United States, have dropped only slightly. According to Information Resources (news/quote), a market research company based in Chicago that tracks sales nationwide, the cost of a can of one brand, Yuban, is selling for $3.77 a pound, only 16 cents, or 4 percent, less than it was in January

2000. But the price of green coffee has been slashed by about 50 percent during that time.

"If the income of coffee producers is less than half of what it was a year ago, why hasn't any of that been passed on to consumers?" asked Deborah James, a director at Global Exchange, an organization that supports better treatment for coffee farmers and other agricultural workers. "We're in the midst of a profit bonanza right now."

Although they often cite sharp increases in the cost of green coffee supplies when they raise prices, the big coffee-roasting companies refuse to discuss their pricing now that unroasted coffee is cheaper than at any time in the last 30 years. "We never discuss our pricing," said MaryJane Kinkade, a spokeswoman for Kraft Foods, which produces Maxwell House and Yuban coffees.

Margaret Swallow, a spokeswoman for Procter & Gamble (news/quote), which produces the Folgers brand, said the company had cut prices to retail chains seven times since March, 2000, but she declined to say what those decreases were. According to Information Resources, the supermarket price of Folgers ground coffee has declined about 16 percent in that time and most recently has sold for $2.80 a pound.

The price disparity between producers and consumers is nowhere greater than at the gourmet coffee level. Starbucks (news/quote), the largest specialty coffee chain with 2,900 company-owned stores in the United States, actually raised its prices 5 to 10 cents since January 2000 and does not plan to lower prices this year.

"Pricing takes into account many elements, not just the cost of coffee beans," said Audrey Lincoff, a Starbucks spokeswoman. Labor costs, rent for high-traffic locations and even the cost of milk and sugar must be factored into the total package, she said.

Starbucks still charges $11.45 a pound for coffee in its stores, although the company has acknowledged the plight of farmers who receive less than 50 cents a pound for their crops. The company promised this month to provide $1 million in financial support to coffee farmers. Starbucks also plans to buy one million pounds of coffee under Fair Trade, an international program that sets a minimum price of $1.26 a pound.

Starting next spring, Starbucks plans to increase its use of Fair Trade coffee by making it the "Coffee of the Day" one day each month.

Amid the coffee industry's problems, Americans are showing no sign of surrendering their claim to being the world's biggest coffee consumers. They spend $9.2 billion a year on retail coffee in supermarkets and specialty stores and an additional $8.7 billion for brewed coffee, espresso and cappuccino in restaurants and coffee bars. According to the American Coffee Association, a trade organization based in New York, orders for roasted coffee beans ‹ an indication of coffee consumption ‹ took a fall immediately after the terrorist attacks but have recovered.

As for the New York Coffee Exchange, its trading floor was at 4 World Trade Center, a nine-story building at the foot of the twin towers. When the towers came crashing down, tons of debris fell on the building, which had already been evacuated. Cocoa, sugar, cotton and some other commodities also were traded there. Mark Fichtel, chief executive of the New York Board of Trade, which oversees the trading for coffee and all the other commodities, said it would have been technically possible to resume trading on Sept. 12, because a duplicate trading floor had been built in Long Island City five years ago in response to the 1993 bombing of the trade center. The delay of four trading days was caused by logistics, Mr. Fichtel said.

The cost of keeping that backup system equipped and ready to go, with duplicate files and computer systems, was about $300,000 a year. Mr. Fichtel said there was some resistance to the concept "especially around the time the bills had to be paid." But having such a detailed contingency plan meant the exchanges could resume trading soon after the disaster, and did not have to fear losing business to competing exchanges like the London Coffee Exchange.

RIGHT now, the two 300-square-foot carpeted trading pits are used in rapid-fire 90-minute sessions by traders buying and selling futures and options on coffee and all the other commodities. Before Sept. 11, each crop was traded for five hours a day in its own trading pit. Now there are only two pits for all of the commodities. Mr. Fichtel said that by the middle of November, two additional pits would be opened, increasing daily trading time to two hours for each commodity. By the end of January, two more pits will be added, lengthening the daily trading sessions to three hours.

While that will help restore the trading process to normal in New York, it will not help resolve the serious problems in the world coffee market, which is of vital importance to 50 developing countries. "There's definitely a temporary glut that's driven prices so low it's become a crisis," said John M. Talbot, an assistant professor of sociology at Colby College in Maine, who is writing a book on coffee. "Chances are that after a few years, supply will be brought back into balance with demand. But the devastation that will happen in the meantime is morally unacceptable."

Mr. Talbot said the instability in coffee prices had been caused in large part by the cancellation of the International Coffee Agreement in

1989. The agreement was an attempt by the United States and other democracies in the cold war to support the economies of developing countries and prevent the Communists from making political inroads. The agreement kept prices high and established production quotas to balance supply and demand.

By 1989, with the cold war almost over, the United States pulled out of the agreement. Free global competition was introduced, and prices began to fall. But a 1994 freeze in Brazil reduced the supply and sent prices soaring. The higher prices encouraged impoverished farmers to plant more coffee trees.

It takes three to five years for a coffee tree, sometimes called a bush, to start producing fruit. With the aid of good weather, and demand for coffee growing at only 3.5 percent a year, coffee soon started backing up in warehouses. As prices slid, supply continued to grow, further depressing prices. An attempt this year by the Association of Coffee Producing Countries to stabilize prices failed when members refused to withhold one-fifth of their harvest from the market. The head of the organization said recently that the fledgling cartel would shut its doors in January, the victim of selfishness, born of desperation, among the coffee- producing nations.