Memorandum by the Acting Chief, Commodities Division (Cale)9

The following is a summary of a somewhat longer memorandum I prepared over the weekend concerning some of the factors that should be considered in connection with the request of the coffee producing countries for an increase in coffee ceiling prices:

Our coffee supply situation is now so grave that we may not be able to avoid a return to coffee rationing, regardless of the decision on [Page 354] coffee prices. Granting the increase would to some extent improve our chances of avoiding rationing. Granting the increase without obtaining some assurance from the Governments of the producing countries that supplies will continue to be forthcoming at those prices would probably give only temporary relief from our supply difficulties. There are reasons for believing that the Governments of Brazil and Colombia may be in a position to assure supplies for one or two years at new prices mutually agreed upon. Whether or not they are prepared to do so and whether they would be able to act with the required degree of toughness to fulfill the commitment, if made, are questions the answers to which are uncertain.
Although the Office of Price Administration is in a better position than I to judge the possible harmful effect of an increase in coffee ceiling prices on the stabilization program, the following are reasons for believing that officers of that agency may have over-emphasized the danger:
The cost of coffee is an almost insignificant item in the cost of living, its weight in the cost of living index being .6 of 1 percent.
The stabilization program is still considered to be reasonably well intact in spite of substantial increases in the prices of domestically-produced agricultural and other products and of various adjustments that have been made in certain types of wages.
The list of items for which an increase in coffee prices is most likely to set a precedent is believed to be relatively small. It consists of staple agricultural commodities which are not produced in the United States but which are imported from countries that have been less successful than the United States in controlling inflation. It is believed to be the area in which we have most rigidly applied price control and our policy with respect to the prices of such products should perhaps be reexamined anyway.
It is impossible to obtain accurate figures on the cost of producing agricultural products in the other American republics. The Office of Price Administration would in any event be forced to refuse to increase its maximum prices on the sole basis of increased production costs in foreign countries, since many of them do not adequately control prices. Coffee production is perhaps still carried on in most countries on a basis that does not involve plantation owners and small farmers in a loss. However, the former are perhaps not now able to pay wages as high as those paid in certain other industries whereas money wages and money costs of production have little meaning to the latter since they would find it difficult to shift to any other industry and since they and the members of their families generally furnish most of the labor used in the growing of coffee.
As a result largely of inflation in the coffee producing countries real income from coffee production is now much lower than when the present coffee price ceilings were established. A memorandum recently received from the Colombian Foreign Office claims, on the basis of statistical information it contains, that the real income of Colombian coffee growers is now lower than at the time the Inter-American Coffee Agreement was negotiated in 1940.
Although unprofitable prices extending over a long period of years could reduce future coffee production and eventually result in very high prices, the argument of the producing countries that present ceiling prices are in fact now impairing future production is believed to be greatly over-emphasized. In this connection it should be remembered that from five to seven years must elapse between the time new trees are planted and the time they begin to bear, that they do not reach maximum production until the 12th to 15th year, that they usually continue bearing for many years more, and that coffee prices up until a year or so ago undoubtedly were profitable.
Parity for Santos 4 coffee is 22.13 cents per pound, using the 1909 to 1914 base, as compared with a ceiling price of 13.375. Prices of agricultural commodities in this country have, on the average, increased by 39 percent since coffee prices were frozen in December 1941.
Coffee prices for Africa coffee, which is now used to supply the European market, are much above the equivalent of the United States ceilings for such coffee. For example, Ethiopian coffee is now selling for 7 or 8 cents per pound above the ceiling established for it by the OPA10 in 1941.
European countries appear in a few isolated cases to have paid more than our ceilings for small quantities of coffee in Latin America. If we continue to maintain our ceilings and the producers continue to refuse to sell at those prices, it is likely that such cases will become more numerous.
The outlook is for more than enough coffee to supply world requirements for the next five years, even allowing for a reasonably rapid restoration of European consumption and even assuming the continuation of the very low level of Brazilian production of the past four years. The probability is that the present stock of 27,000,000 bags of Brazilian coffee (not counting the current crop) will be increased.
The Brazilian Government has just announced a plan for subsidizing the exportation of coffee as is stated in the following telegram [Page 356] of March 17 (No. 855)11 from the American Embassy in Rio de Janeiro:

Among measures approved by recent Interstate Coffee Conference12 (re Embassy’s telegram No. 846 of March 1611) was subsidy on coffees of 1944–45 crop ranging from 65 cruzeiros per bag on São Paulo and nearby coffees down to 15 cruzeiros for Bahias and Pernambucos; parallel bonus for coming 1945–46 crop; and export bonus ranging from 36 to 18 cruzeiros on past crop coffees. Also one year loan to growers without interest in amount of 60 centavos per tree. Full text of agreements reached being forwarded air mail.13

Santos market easier, 27,000 bags registered March 15, and good prospects for early handling of prospective army business.

In view of the foregoing, particularly item 10, it is doubted that the Department will wish at this time to urge an increase in coffee ceiling prices. If the agencies of the Government in charge of procurement activities wish to have prices increased as a means to obtaining supplies we should, of course, not object. It is believed that we should, in any event, explore fully the possiblity of working out with the interested agencies of the Government a program with respect to a ceiling for coffee and for other imported agricultural commodities that is in so far as possible in keeping with Resolution XV of the Mexico City Conference.14

Edward G. Cale
  1. Addressed to Assistant Secretary Clayton and to his Deputy, Edward S. Mason.
  2. Office of Price Administration
  3. Not printed.
  4. The Brazilian Interstate Coffee Convention which met in February and March, 1945, and indicated support for government subsidies and interest-free loans for the coffee industry.
  5. Not printed.
  6. Embassy report 181, March 19, 1945, not printed.
  7. For documentation concerning this Conference, see pp. 1 ff. For text of Resolution XV, see Pan American Union, Final Act of the Inter-American Conference on Problems of War and Peace, Mexico City, February–March, 1945, pp. 52–53. In this Resolution the Conference approved a statement that criteria analogous to those applied to ceiling prices of products of domestic industries should be applied to the products of the American nations, and that price ceilings should bear an appropriate relationship to costs of production.