The Tea & Coffee Trade Journal / July 1996
By Larry Luxner
RIO DE JANEIRO -- Oswaldo Aranha Neto, president of the Federação Brasileira de Exportadores de Café (FEBEC), is clearly worried.
During a lengthy interview June 11 at his office in Rio de Janeiro, the businessman said Brazil -- the world's largest coffee producer and exporter -- "is going through a real examination of the future" and needs to reassess its priorities.
"After so many years without government interference, what the industry has found out is that there are some minimum requirements we need from the government, and I don't mean pulling away from the free market, or asking the government itself to be in the business," he said. "Basically, there is no coffee policy in Brazil at the moment. Some congressmen, especially Carlos Melles, have formed a parliamentary commission to propose a new management for Funcafé, the fund that controls all the cash and coffee stocks that belong to the government."
Aranha Neto, 48, studied economics at Essex University in England, and lived in New York for many years. The president of a small coffee company, Aralupe S.A., which has plantations in Bahia and southern Minas Gerais states, the executive headed FEBEC for two years in the past, and was recently voted back into his old job a few months ago. He now divides his time between Rio, São Paulo and his thriving coffee business.
Aranha Neto said that last year, Brazil exported over $2 billion worth of coffee -- more even than soybeans. Yet how much the government should be involved in the industry is still a matter of fierce debate here.
"Brazil had too much government at one point," he told The Tea & Coffee Trade Journal. "The Instituto Brasileiro do Café (or IBC, which was in charge of the coffee business from 1952 to 1990) was doing everything. We had a failure of government in the 80s, and the IBC was part of it. During the Collor administration, we went from too much to none. For the last six years, the government and the private sector have been negotiating. In my view, we need precise rules in which to operate. In spite of government's reduction in the coffee business, there's one unavoidable factor: the Brazilian government controls in excess of 14 million bags."
Not everyone agrees with FEBEC. Indeed, several leading coffee exporting companies, among them Cargill Agricola S.A., Volcafé Ltda. and Esteve Irmãos S.A., broke away from the umbrella organization, though they still belong to the six regional groups that make up FEBEC (Santos, Vitoria, Bahia, Rio de Janeiro, Paranaguá and Varginhia).
"They defended the free market," he explained. "This whole thing came about when we proposed an aggressive program whereby the private sector would basically take over several functions that belonged to the government: coffee promotion, improving the structure for shipping coffee, investigations into productivity, crop estimation and so forth. As part of that program, there was a quota system which the government asked us to implement. That obviously caused problems."
Aranha Neto, whose term as president of FEBEC expires in May 1997, said Brazil's normal crop is 30 million bags a year or more. "We haven't seen that in quite some time, especially since the 1994 frost and drought," he said. "But we should be able to export, including soluble, 18 million bags this year."
Jair Coser, president of Unicafé -- Brazil's largest exporter of coffee beans -- and the president of FEBEC before Aranha Neto took over, says Brazil's coffee exports will come to 12 million sacks, because the 1995 harvest was small. Estimates predict revenue from coffee exports of about $1.5 billion this year, compared with $1.6 billion last year. Coser says Brazil must increase its coffee-producing area and production to around 33 million sacks.
"At FEBEC, what we want is proper rules and transparency," Aranha Neto told us. "We also have a policy of promoting the producers. We believe Brazil's main problem is recovering normal production levels. If we do that, we'll be able to develop consumption."
On the positive side, he added, "internal consumption is close to 11 million bags, and a steep increase in consumption is forecasted, thanks to lower inflation which has generated stronger purchasing power among low-income groups."
Interestingly, ever since President Fernando Henrique Cardoso's "Real Plan" took effect, Brazil's new currency was always worth more than a dollar. That's no longer the case now, since the real is currently trading at around 98 cents. Nevertheless, inflation appears to be under control, with April 1996 prices rising by only 1.62%, according to the Economic Research Institute Foundation.
Brazil's gross domestic product, on the other hand, tumbled by 2.1% in the first quarter of 1996 (compared to a 10.3% jump in the first quarter of 1995), reflecting a deliberate effort by the Cardoso administration to prevent the economy from overheating. Meanwhile, unemployment keeps climbing, hitting 6.38% in March -- the highest since 1992. Economists blame rising interest rates, which have forced thousands of small and medium-sized companies to close down. By 1998, says one consulting firm, 7.1 million Brazilians will be jobless.
At the moment, over three million Brazilians are involved in the coffee industry, which accounts for 5% of all exports by volume.
"Brazil is the world's largest producer and exporter," said Aranha Neto. "The ten-dency is to assume that when you're big, you don't produce quality. But in our case, it's definitely not true. We have exporters that are comparable to any in the world. In fact, the Cerrado region (of western Minas Gerais state) is becoming very famous for production."
Asked why Brazil does so little to promote its coffees around the world, he replied that "until now, there was no reason to invest in promotion, because Brazil didn't have its own labels. However, that is changing, and I think it's time to invest in the future."
One company, Ipanema Agro-Industria S.A. of Alfenas, in the state of Minas Gerais, is doing just that. Already one of the world's largest growers of arabica, the com-pany announced in late June that it plans to expand its coffee plantations from 14 million to 20 million plants by 1998. By September, Ipanema will have produced 105,000 bags of coffee -- 144% more than the 43,000 produced in all of 1995. By 1998, it should be producing 120,000 bags a year.
Ipanema, which processes its own coffee under the Fazenda de Minas brand, expects sales of $15 million this year, with 60% of its production earmarked for export and 40% for domestic consumption.
The opening up of Brazil's economy could also boost coffee's future. In May, Brazil pulled off one of Latin America's biggest privatizations ever, with the sale of 50% of Light Rio Serviços to an international consortium. Houston Industries Inc. and AES Corp. of the United States, Electricite de France, the Brazilian industrial group CSN-Vicunha and BNDES, a Brazilian development bank, paid $2 billion for control of Light, whose service area covers 2.7 million customers in Rio de Janeiro and 27 other municipalities. Railroads, ports, phone companies and other government-owned enterprises are also in the process of being sold off over the next few years.
"We are hoping that privatization of the railroad system and the building of new ports will help us," said Aranha Neto. "The port structure in Brazil is still extremely expensive. FEBEC was part of the movement by several business associations to change regulations to enable the ports to become more efficient. We have too many problems with theft, and we want to avoid that."
Chronic congestion problems at Brazil's chief ports started about two years, after the Brazilian government opened up the country to imports, according to the Journal of Commerce. With a weak U.S. dollar and a strong Brazilian real, U.S. products became relatively cheap and began flooding Brazilian department stores. As a result, the number of 20-foot containers with U.S. exports headed for Brazil jumped by about 70% last year -- catching port officials off-guard. Last year, ships sometimes had to wait for weeks to get in or out of Santos, though congestion has since eased a bit. According to FEBEC statistics, Santos handles 62.6% of Brazil's coffee exports, followed by Vitoria (28.6%), Rio de Janeiro (5.76%) and Paranaguá (1.66%).
Yet one industry source doesn't think Brazil's port situation is so bad.
"Coffee is different than manufactured products like steel, where Brazil is compet-ing with Japan or Korea," said the source, who asked not to be named. "I would say that of the coffee-producing countries, Brazil is probably the most efficient in terms of logistics. Our competitors are more inefficient than we are. The inefficiency of the Brazilian system is glaring, but not when compared with Ethiopia, Kenya or Nicaragua."