More On Venezuelan Coffee

admin — Thu, 03 Sep 2009 15:16:26 +0000

Venezuelan Coffee Industry Suffering – Financial Times

A little different from my usual topics, but these kind of stories are a good indicator of what happens when a government tries to decree how every aspect of the economy works. It doesn’t matter whether it’s currency or coffee beans – price controls lead to shortages, supply and demand get distorted, and a black market springs up.

“But analysts say many of the problems confronting coffee production – and the private sector in general – are caused by precisely this kind of government intervention. Such expropriations, as well as an aggressive land reform campaign, have generated a climate of uncertainty that has damped investment.

Price controls have made matters worse. Increasing amounts of coffee – and many other goods – are smuggled abroad to be sold at international prices. “Of course there’s contraband. What does Chávez expect when you can sell coffee in Colombia for double or triple the price?” said one coffee producer, who requested anonymity.” (Financial Times)

Venezuela used to export coffee all over the world, and there was a time when they were on par with Colombia. Now, it’s actually importing coffee from Brasil! In fact, domestic farms barely manage to produce half of the nation’s domestic consumption.

As we saw in the case of Black Market Bolivars, that means expensive, imported coffee. In trying to organize and protect domestic industries with the blunt instrument of state policy, Chavez has once again fallen prey to the law of unintended consequences. Although not identical, currency controls can undermine trust in the local fiat currency, prompting flight to quality. The coffee situation bears some resemblance.

There hasn’t been a drought or a change in growing conditions, and global coffee prices have generally increased over the past years. Of course, coffee isn’t money – it’s not totally fungible, and beans from Brasil aren’t the same as those from Venezuela, or Ethiopia, or Indonesia.

Because of this, Venezuelan coffee is a distinct brand, differentiated from the competition. But Venezuela has been known for high-qualtiy Arabica beans, as the article points out, and producers like Don Paparoni (what a name!) are giving up their family plantations for pasture and other pursuits. Finally, coffee isn’t the only victim.

“Food imports have quadrupled in the past 10 years, from about $60 to more than $250 per person per year, says Hiram Gaviria, former agriculture minister. Imports cover about two thirds of food consumption in a country that boasts vast areas of unused, fertile land.

While production of some foodstuffs such as maize and rice has increased in this period, the production of beef and sugar, in which Venezuela used to be self-sufficient, is today barely half national consumption.” (Financial Times)

The market is there, globally – but it’s been badly distorted. In trying to fix domestic coffee production, the Venezuelan leader has exacerbated the very problem he set out to cure. Shame on Mr. Chavez.

Riches Among The Ruins » Coffee

More On Venezuelan Coffee