Price prospects for major primary commodities, 1988-2000 (Vol. 2 of 2) : Food products, fertilizers, agricultural raw materials

14 ISI Price Prospects for Major Primary Commodities, 1988-2000 (C'roptAiments of Volume ii 1weki~NAL DOCUMENTS LUNIT Volume 1"lISI x^_434,61 '.- 4e1. Fo Products Fertilizers Agricultural Raw Materials f r ]~~~~~~  Price Prospects for Major Primary Commodities 1988-2000 Volume II Food Products Fertilizers Agricultural Raw Materials The WfrIctJank Wa5hington, D.C.  Coprht C 199 The Frld Bank 1818 H Street, N.W Washington, D C. 20433, U.S.A. All rights reserved Manufactured in the United States of Armerica First printing Februarv 1969 Future ievelopments in cmmrnoditv markets cannot be known with certaintv: However, in activities involving comnodities. judgrnents hae to be made about future events in these rnarkets. The forecasts presented here are judgnents based upon analvsis of the commoditv markets and on disc-ussions with people with expertise in these mnarkets. However, no representation is made that the findings, interpretations, and condusions expressed are accur3te or complete; they are entirely those ol the aAh Nr(s) and should not be attributed in an! manner tO the WVorld Bank, to its affiliated organizatino-s, or to members of its Executive Board or the ctountries thev represent. Users of the intormation in this publication should recognize the large degree of uncertaintv associated with these forecasts and use them with appropriate caution. The World Bank aoes not take anv responsibility for the results o.f anv actions taken by purchasers of 'his publication based on the nformation therein. Because of the informality and to present the results of research with the least possibkl delav, the ty-pescript has not ?een prepared in accordance with the procedures approprie-te to formal printed texts, and the World Bank accepts no responsibility for errors. The material in this publication is copyrighted. Requests ftor permission to reproduce portions of it should be sent to Director, Publications Department at the address shown in the copyright notice above. The WVorld Bank encourages dissemination of its work and will normaliv give permission promptlv and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will bte appreciated. The complete bac',I-st of publications from the World Bank is shown in the annual lndex of Publications, which contains an alphabetical title list and indexes of subjects, authors, and co rntries and regions; it is of value principaliv to libraries and institutional pur'-hasers- The !atest edition of each of these is available free of charge from Publications Sales Unit, Department F, The WVorld Bank, IS18 H Street, N-W., Washington, D.C. 20433, U-S.A., or from Publications, The Woi.d Bans., 66, avenue d'lena, 75116 Paris, Fe-nce. Contributors to this volume are Takamasa Akivama (coffee, tea), Ronald C. Duncan (dairy products), Mathurin Gbetibouo (cocoa), Donald F. Larson (vegetable fats and oils), Donald 0. Mitchell (beef, grains), C. Suan Tan (rubber, sugar), Maurice E. Thigpen (cotton, jute, tobacco), Panavotis N. Varangis (tropical timber), and Maw-Cheng Yang (bananas, fresh citrus fruits, and fertilizers, Library of Congress Cataloging-in-Publication Data Price prospects for major primary commodities, 1988-2000 / World Bank. p. cm. Contents: v. 1. Summary, energy, metals, and minerals- v. 2. Food products, fertilizers, agricultural raw materials. ISBN O-8213-1190-5 (v. 1)-ISBN 0-8213-1191-3 (v. 2) 1. Prices-Forecasting. 2. Farm produce-Prices-Forecasting. 3. Raw materials-Prices-Forecasting. 4. Fuel-Prices- Forecasting. 5. Agricultural prices-Forecasting. 6. Food prices- Forecasting. 7. Commodity futures. I. International Bank for Reconstruction and Development. HB231.P82 1989 338.5'2-dcl9 89-5529 CIP  oTENTS Notes and Definitions ...................... i Coimodizy Descriptions ..... ,.. vii FOOD PODUC7S AND FERTILIZERS Coffee ..................... 3 Sumary ...................... 3 Recent Developments in the World Coffee Market .......................... 4 Supply Outlook .................................................... 5 Demand Outlook .................................................... 8 Price Outlook . ................................................... 10 Policy Issues .................................................... 10 Cocoa .................................................... 19 Sumum ry................................................ 19 Recent Developments in the World Cocoa Market . . 19 Production Prospects ............................................... 20 Demand Prospects ............................... 22 Price Outlook .. .............. 24 Trade Prospects ............. 26 Policy Issues .. 2' Tea _.. ..................,.,.37 Summary . ............................................ 37 Recent Developments in the World Tea Market ............................ 38 Supply Outlook ..............,........,,... 38 Demand Outlook ... 40 'irade Outlook ..............,.,. ... 41 Price Outlook ...................,.,,.41 Sugar .... 49 Summary ... 49 Sugar Production ........................................,.,..S50 Sugar Supply Projections ..54 Recent Sugar Consumption Developments ..55 Consumotion Prospects ............................ . .59 Sugar Exports ........................ 60 Export Prospects . ..... 62 Sugar Imports ............................. 63 Import Prospects ............................ .. .... . .. 66 Price Outlook ................................. 67 Bananas ........................................ ........ 77 SumAry. . . .. ... .. ... .. .... ................... 77 Outlook for Import Demand ............................. 77 Outlook for Exports ........... .................. 79 P'rice Outlook ...o................ ** ...,..........4.. 81  - iv- Fresh Citrus Fr-uits ........................................................ 87 Sumary ................. 87 Supply Outlook ................. 87 Dlemand Outlook .................. 89 Trade Outlook ........................................ ................. 91 Price Outlook ............... 92 Policy Issues: Tariff and Non-Tariff Trade Barriers . ............ 93 Policy Issues: Governmental Assistance ................ 95 Grains ...... 115 Sumnary ... . . ....................................................... -115 Recent Developments in the Grains Economy . . ........................... 116 Price Forecasts .. ..................................................... 119 Comparison of the 1988 Forecasts with the 1986 Forecasts .............. 120 Spectral Forecast ....... 121 Production, Consumption, Trade and Stocks .... . ........................ 124 Update on the US Food Security Act .................................... 129 GAT ......... 132 Vegetable Fats and Oils .................................................. 155 Pr.ce Prospects ................................................. 155 Market Structure and Price Forecast Models ............................ 156 Supply Forecasts ......................................... 159 Demand for Vegetable Oils .......................... 162 Policy and Trade .. ........................ 168 Price Instability .. ........................ 174 Beef .... ............................ 217 Supply 0 ' look ............................... 217 Demand Outlook .............................. 218 Dairy Products ................... 223 Price Forecasts ................... 227 Fertilizers . .................. 229 Sunmary ..... 229 Demand Outlook ..... 230 Supply Outlook .... . 232 Trade Outlook ....... 237 Price Outlook ............ .... . ........ 238 AGRICULTURAL RAW MATERIALS Cot to ... ........ 265 Sunmary .. . ............... 265 Demand Out look . ...................... 266 Supply Outlook .................. *.................*.271 Trade Outl ook ....... ....... ..... ............. 273 Price Outlook .......... ... o.......... 274  - V lute .. .. . ... ... .... . ...... ......... . . , .283 Suunury ........ ...... I............... .t.. 83 Deinand Outlook ......... 284 Supply Outlook . ....286 Trae Ouatlook .. 288 Price Outlook ... ............................ 290 Comparison of the 1988 Price Forecast with the 1986 Price Forecast....290 Natural Rubber ..299 Sury 299......299 Natural Rubber Supply Outlook ... ... 300 Supply Outlook ..303 Denand Outlook ............. 306 International Trade in Rubbers ............................... 312 Price Outlook ...315 Tobacco ........... 327 Sumiary .... 327 Demand Outlook . . .. 327 Supply Outlook .... 331 Trade Outlook . . . ................. 334 Price Outlook ....334 Tropical Timber ....343 Sunmary ...343 Recent Developments ...343 Supply Outlook . . .348 Dem nd Outlook . . . 348 Trade Outlook .. .349 Price Prospects . . .352 Policy Issues . . .353  - vi - MMTKS AND DEFIMITIOUS -Dollars are United States dollars unless otherwise specified. -All tons refer to metric tons (1,000 kilograms) unless otherwise noted. Abbreviations and Sybols TOs = metric tons LB = pounds CU = cubic meters KG = kilogras NTOK = millions of tons of oil equivalent MA = not available ..1-J = no data = least squares growth rate for the said period is not meaningful due to the shortness of the time period for which data are available, or due to rapid growth from a low base. Economic Classifications Industrial Countries* North America...includes Canada, United States. EEC-10...includes Belgium-Luxembourg, Denmark, France, Federal Republic of Germany, Ireland, Italy, Netherlands, Spain, United Kingdom. Other Western Europe...includes Austria, Finland, Iceland, Liechtenstein, Norway, Sweden, Switzerland. Asia and Oceania... includes Japan, Australia, New Zealand. Centrally PlAnned Econowies USSR Eastern Europe...includes Albania, Bulgaria, Czechoslovakia, German Democratic Republic, Hungary, Poland, Romania. Developing Countries Southern Europe...includes Cyprus, Greece, Israel, Malta, Portugal, Yugoslavia, Turkey. Africa...includes South Africa. Latin America and the Caribbean...includes Cuba. Oceania...excludes Australia and New Zealand. Asia...excludes Japan; includes China (which includes Taiwan, China, except where specifically noted), Democratic Kampuchea, People's Democratic Republic of Korea, Lao People's Democratic Republic, Mongolia, Viet Nam. * Also includes American Samoa, Guam, Pacific Islands, Puerto Rico, US Virgin Islands with North America; Bermuda, Channel Islands, Faeroe Islands, Falkland Islands, French Guiana, French Polynesia, Gibraltar, Greenland, Isle of Man, Martinique, New Caledonia, Reunion with EEC-10.  - vii - ~at maur,si Pit_Wom. emwm DMC ipCa (>C goar_1t siol, Val btedw by OC espurts) Tbre_a Cost. (12.01L iWlb. I sulfur. 121 a_i. FOR Pitrs. t_trm PAWNS ibtalk eIC (1O). ledictc prier, othbr mild Arabicas. ~rgMm i_ r turk aid _maAfmbu oekmts. i-.dck fwr pr_t shimat C(tlo )M . daily aeag price. _bm Ywk sod Londem, _mtrest bim fute tVOdi 5 stt's Tee (1afm Auction). irage ice reemied for *11 tom Suur hrtd). ISA daily piice, FCai sa st at "tw Caribbem ports Bef nZ), isuoted from bomtiess, 851 eisibe low cow in*t. FIII port of mmtry am t(C_trol Vid $outh ewi i. first-clan quality troical peck. FW S powts Or_mps (OM Ittmaramm Epor t.s). EEC indicatI imcort ori ca. CIF Paris CEMLS Rice (Thai). ubi to . *Iled, tS brokem. go_romt St_adard. eport prIce, FCO 8_gkok beet (CaMdIb). hDI. I Mto* lfud Seimg (CS) 15,51 baSis is store t4-1 4m_stic; fro April 195, St. L_aurece, export Wlzv PiA). no. 2, Vl low, FCO Cuol poets Cra Solregm (US). No. 2, PIto yel!ow. FP Gulf ports FATS AM Oi LS Palo Oil (1a1lasian), 5S bulk, CIF N.V. Europe e_comt OfI (tPhllpPlaaa/le1owioa). bullk, CIF Rotterdam Grn t Oil (NiprliamJot Africa), bulk CIF UK, ttrough Janery 1977; subsequmntly (any origi.), CIF tttardsm Soyb'a 011 IDutch), crude. FO o-ei ll Soybmm US ) C IF Rotterda Cra MPbIlippina/lodoml msia). bulk, CIF N.V, Eturo Pail Kervels (Nigorian), CIF UK l u t Most -1rdian), 481. CIF h%ttorSam; fr-rr 19, Argentioe, 4Y/50% Soybean Meat (LS), "% extractlon, CIF Rotter4a Cottom (Outlook 'A- Index), Middling (I-3/32-, CIF Europe ltm (Sml1as"h). 'bite D, FOS ChiittagongCana R rbb (SN o, 1). in bales, spot We Tork r,acco (Indian), flfm-curod, amamx apeort un,it value Lop (Malaysian), M_eeuti, Sabah SO Best 9ual ity sale price chwagd by importr-s, ,aian Log (siet African), Sqpmll, high quallty, loyal ad rchand, FOB Cmr_m Sammol (iblayslem), Dlek Amd k.r5itl, s elct and better qualifty steodard density. CIF Frach ports METALS AiO NiNltS Copwr (IE), cash wurebr through to,ere 1961; fr-o Decemb 1918 ttrough Jum 196, high grade cathodes n, tt I mnt price; s0seqent ly, grade A Tin (Mflmysiam), Straits quality, ex-alter, Pon , official s*ttlennt price Nickel (Caadian), mlmctroiytlc cathodes, tii 99.9S shipping :oiat; from 1900 (ILE) cattodes, mIniml 99.8% purity, official orning sosion _eekly average daskad price Aluminum oprentativm Frm Market Price), Ir5ots, 95.79 Purity, transactioes prIce, EEC duty Paid Led (UXE), settl_nt price, refined lead, Purity 99.97% Zinc (I), sotti_*nt price, good ordinary brand; from Sept. 19i4, High Grade rid li- -Or (Braziilan)i 651. CIF North Sea p:x-s imiteo, iS Import referance price based on imports from Jaica through 1974; frr_ 1975 UiS leport price, CitF iS port Gui4 (i;C, 99.5S fine, LAdm fteenoon fixing, average of daily rates Sliver i_y & Hmren)., 99.9% grade reflond. Mm York FEliTI LI PFosphaft hock (nooccan), 72% PL, FAS Casablanca; from 1961, 70S TPt contract Was (ay origim), beggd. FOS N.. Eur TSP (Triple Ssperphospete), bulk, F0B US Gulf OOWP iD!_osim Pisosft), bulk, FOS US Guif Potaslsm ChIloride (ilurit of PotFah), bulk, FCP Yenouvnor  I no 0 0 PC Po 0 co '4 N U)  Sumary 1. Prospects for the world coffee economy depend critically on developments in the International Coffee Agreement (ICA), on exchange rate policies, and on productivity growth in major coffee-growing countries. In particular, Brazil (the major producer) is likely to continue to play an extremely important role in determining the future path of coffee prices. 2. After prolonged negotiations, the ICA export quota regime was re- introduced in October 1987. The reintroduction basically resulted from the strong determination of both producing and consuming ICA member countries to keep world coffee trade under a controlled system. Given such determination, for the base case projections it is assumed that the ICA export quota system will continue to operate through the year 2000. It is further assumed that the global quotas will increase at a rate of about 1.5% p.a. for the period 1989-2000, which approximates the projected demand growth rate of the total import demand of the importing ICA members--who at present account for more than 85Z of world net imports. An import growth trend of this magnitude should keep world coffee prices 1/ in the range USC195-215/kg in 1985 prices-- leaving aside price peaks resulting from natural disasters. 3. Imports by countries which are not members of the ICA (the nonquota market) is expected to increase at about 2.6% p.a. However, competition between sellers in this market is expected to be severe. 4. During the forecast period, there is a high probability of Brazil experiencing low production in some years due to abnormal weather. When such production declines occur, world prices will increase sharply, and the quota system may be suspended temporarily. But because Brazil is expected to produce on the average as high as 35 million bags a year during the 1990s, any such increase in prices will be short-lived. 5. According to results coming from the World Bank's recently revised global coffee model, world production could easily be increased to satisfy world demand if prices are in the region of USC195-215/kg in terms of 1985 constant dollars. This result is due partly to the competitive exchange rate policies taken by the three largest coffee producers: Brazil, Colombia, and Indonesia. These three countries have devalued their currencies in real terms by about 35% in the last five years. As a result, they have been able to maintain or increase their coffee production even as world prices in real terms (nominal prices deflated by MUV) have declined by more than 30% in the last five years. Not all exporting ICA member countries, however, will be able to increase exports by 1.5% p.a. El Salvador, Honduras, Guatemala, Haiti, Dominican RepubLic, Nicaragua, Peru, Venezuela, Cote d'Ivoire, 1/ World coffee prices here refer to the ICA "Other Milds" Indicator Price, unless specified otherwise.  - 4 - Ethiopia, Madagascar, and Angola could find their production stagnating and could experience difficulty in fulfilling their export quotas. 6. Besides real exchange rate movements, productivity growth will have a very important role in determining the production path of each producing country. Lack of productivity improvement has been an important reason for the stagnant production experienced in many African countries. Unless measures are taken to address this problem, their market shares and inCome terms of trade are likely to decline. 7. An important policy issue facing many producing countries is whether to support the continuation of an international export quota agreement. This is an important question for many African countries which have been losing their shares of the world coffee market over the past two decades. If the Agreement continues (an assumption made in the base case projection) they will have little opportunity to expand their shares at the expense of others. On the other hand, for those countries heavily dependent on coffee exports, they face the prospect of export revenues increasing at 2% p.a. or iess--hardly the basis for a take-off of economic growth. 8. Judging from some issues teing discussed amorg the ICA member =ountries, a ne agreement may not come into effect after September 1989. Consuming countt.es, especially the United States, are quite dissatisfied with the sales to tht nonquota market countries at large discounts and the current quota allocatiols among various types of coffee. If the quota system is discontinued af er October l189, the world coffee market would be quite different from tiat seen in terms of the base case projections. 9. Simulation results of the new econometric model show that world prices would be about 30% lower in 1990 and 10-20% lower for the following three to four years if the quotas are suspended, compared with the base case projections. In such a situation export revenues of efficient producers such as Brazil, Colombia, and Indonesia would be expected not to decline very much because these countries would be able to increase export volume. However, many countries in Central America and Africa would be likely to experience sharp declines in export revenues as both export volumes and prices would decline. These countries would need to consider adjustment of macroeconomic policies, including real exchange rates, to cope with such a situation. Recent Developments in the World Coffee Market 10. The world coffee market was subject to a substantial shock when Brazil's production fell sharply in 1986 after a prolonged drought in 1985. This caused a sharp rise in coffee prices in late 1985 and early 1986. After peaking in March 1986 at 'ISc529/kg, prices fell steadily until July 1987 when they hit USU204ikg. T ICA export quota system was suspended during the price boom. ICA members were unsuccessful in reimplementing the quota system before October 1987 due to disagreement among them over the question of quota distribution among the exporting members. The flexibility and objectivity of the distribution of export quotas became r major issue.  - 5 - 11. Dur.ng the extended discussions among ICA members in 1987, it became clear that there were a number of exporting member countries, as well as several importing memoer countries, that were not happy with the way the Agreement had operated since 1980. The discussions revealed, however, that although many meirber countries were dissatisfied, there was a very strong will to conf:i^ e the Agreement. 12. Anot;;er important development has been the changes in real exchange rates which have taken place in many cofUee-producing countries over the last five years (see able 1). Notably, the currencies of the world's three largest cotree-produciro countries--Brazil, Colombia, ai.d Indonesia--have depreciated more than 30_ in real terms, which has meant that even at the low levels in the first half of 1988, world coffee prices (at around USc295/kg) increased in terms of local currencies in these countries. On the ither hand, the CFAF, which is linked to the French franc, has appreciated substantially, increasing the cost of coffee production in the CFAF-zone countries such as Cote d'lvoire ind Cameroon substantially in terms of US dollars. In 1988 the relative competitiveness of CFAF countries in terms of real exchange rate changes is otriv one-half what it __. in 1982. For the future, the movements of the exchange values of the major currencies will be of critical importance. Of equal importance will be the independent exchange rate policies fo'lowed by the coffee-producing zountries. 13. Low worid coffee prices in 1987 due to the suspension of the ICA export quota regime caused many ICA imporring member countries to increase their imrorts substantially. This increase was partly tor the purpose of stock accumulation. Large carry-over stocks in consuming countries are expected to reduce import demand in 1988. This is the main reason for the low levels of wcrld coffee prices in 1988 in spite of the low global quota and depreciation of the US dollar against other major currencies. Supply Out look 14. Due to substantial real exchange rate depreciation and productivity increases, the three largest producers--Brazil, Colombia, and Indonesia--are projected to increase their production at rates of 2.1% p.a., 1.9% p.a., and 1.2Z p.a., respectively, in the next 12 years. Their production is likely, on average, to be above demand and, thus, stocks in these countries are likely to increase. Increasing production and the accumulation of large stocks in. these countries are the main reasons why prices are expected to be fairly stable and at historically low levels in real terms. For the same reasons, any price hikes due, 'or example. to frosts in Brazil will be short-lived. 15. Within Brazil. efforts to reduce production costs by increasing tree densities and by shifting coffee growing away from the frost-prone and higher labor cost states of Parana and Sao Paulo to lower labor cost states of Minas Gerais and Espirito Santo have been successful and are likely to continue. However, if the Government's agricultural credit policies or the extension services of the Brazilian Coffee Institute (IBC) fail to satisfy coffee growers' needs, Brazil's average production may not reach the pr;-JecCed 37 million bag level by 2001.  DZ h iA ENO t m V AOtt G C M _St ( W) IS182 163 19it4 1485 246 1487 S.ZIL liceI eACe4 rate 0.IS 0,56 1.85 8.20 15.63 3229 CGoesr price I"" 4C'.OC 784.00 2,924.00 9.55<6.0 23,436.00 76,334.00 RPol - cAqo rate 100_00 5.42 6%9t 6C.17 76,07 63.W COL)S IA oletal tcr_ng- rat 94.08 -8.tt5 100.82 142.15 194.26 237. t Cnes,r rIprice I1I l5stt 190,20 220.80 27.,90 525,70 406,40 Real y rate 100.00 9'.54 84.37 77.?76 67.06 69,14 COSTA RICA Nomial wcehIg rate 37.41 41.09 44.53 50.45 55.99 61.26 Conswe price lnd" 263,b0 345.60 586,0 445,10 *S 497.80 81.80 74,aI exchan9g rate I0. 00 ?2C 72 124.71 126.63 12T.53 136,32 EL SALVAr Inlftal anc6aga rate 2.50 2.50 2.50 2.50 5.00 5.O0 Coasumar Price l1ade '28.30 145.-, 162.10 196.20 261.60 330.00 Real cango rate 1.2,OC 153.25 126.34 154.48 11.95 128.60 GUATWALA %oaln.al nch"g rate .00 1.00 1.30 t.88 2.50 Consmer price l,dan 11 .SC ' 120.80 143.40 196.40 220.10 Ral acfan0g rate 1CC.0 - L06.05 12M.26 93.69 78.75 tIESIA ol,nal CCax .c. ratae 661.40 90)9.30 1,0C5,90 1,1'0.60 1,2S2.60 1,642.09 .c.suw peice ltd., 112.20 122.90 137.40 151.70 154.90 183.50 Real Sxce." rat. 00.00 7S.67 78.95 80.52 73.03 65.88 Noinal sch"n9 rate 326,15 581.06 436.26 44,26 346.30 504.81 Consumer prIce Idex 125.40 146_30 162.90 165.00 17_0C2 183.03 Real wxhanga, rte 100.00 100.61 97.70 9f.25 128,80 139.30 COTE D0"YO9RE NoIftal exchawst rat. 528.61 881.06 436.96 449.26 346.50 304.81 Oonsonr price index 1:6.80 123.70 129.00 131.40 140.10 147.05 Real edming* rate 100.30 91,33 83.06 82,29 113,82 134.74 !4celnsl exchange rate 10.92 1 531 14,41 16.43 16.23 16.30 Con.scer PCrIce index 134.70 15C.20 '65.40 187.00 194,40 202.CO Real eactas raTe 100.00 91.49 93.04 92.28 97.14 100.48 NmInal exchwV. rat. 0.94 1.539 3.597 6.72 14.000 42.8,41 Consc_r price Index 200.70 248.90 355.30 825.90 2,217.80 7,498,W8 Reol exchavg' rate 100.00 75.75 446.26 57.56 74.20 81.90 a/ ForusIa u5 ed to caloCuIte real -ec66n.e rate Is: fXt ' ,2X/mEXt}) CPI/ a2 where: REX, Real Eschwv %to IR r t IElt - Nminal Exchagnq Rate 1-1 yer t 1EX,2 Minsai Exchxnge Rate in 1982 CPlt - Consu_r PrIce Iodex in year t CPI z iConsuwwr ice Index In year 982 b/ CR is ,Ith ISM80 as IOC eccept for Uganda wicti6 Is wlith April 1981 as 100. Source: IMF, International Flnancial Statistics.  -7- 16. Coloebia is expected to increase productivity through its excellent R and D system and because of its relatively high producer prices. Supply problems may arise if the current stumping program fails and if the currency appreciates due to increased exports of coal and petroleum. Also, internal transportation and port facilities need improvements to increase its coffee exports. 17. Kenya is an exception among African countries. It has succeeded in increasing coffee production because of its low export taxes and good R and D efforts. Recently, a new high-yielding CBD-resistant variety, Ruiru 11, was developed. If this variety is adopted widely, Kenya's productivity and production should increase substantially. 18. Countries which may face problems in increasing their exports to meet their allocated quotas include Nicacagua, Dominican Republic, Honduras, El Salvador, Guatemala, Haiti, Peru, Venezuela, C6te d'Ivoire, Ethiopia, Madagascar, and Angela. 19. Nicaragua's real producer prices are estimated to have declined sharply in recent years due to hiSn inflation and an overvalued currency. Real producer prices over the last four years have been less than one-hslf the level of the late 1970s. 20. Real producer prices in El Salvador also have been low in recent years and, with social disturbances, the number of productive coffee trees has declined by as much as 30% in the last 15 years. Unless new trees are planted soon, Salvadoran production capacity is likely to decline. 21. Very limited new plantings and productivity improvements in the Dominican Republic, Honduras, Guatemala, Haiti, Peru, and Venezuela are expected to lead to stagnation in prciuction and exports in these countries. 2?. Coffee growing in C6te d'Ivoire is presently doing poorly as a result of an overvalued currency and competition from cocoa. There have been limited new plantings in the last eight years, and productivity has been stagnant for many years. Unless a vigorous improvement program is launched, coffee production will experience a slow decline with the aging of trees. 23. Ethiopia's coffee sector is also suffering from the lack of new plantings in recent years and poor productivity growth. Insufficient technological development effort and heavy taxation are two of the main causes for the declining production trend. Exports could decline due to stagnant production and increasing domestic demand. 24. Madagascar's coffee production has been stagnant over the last 30 yearsl The major reasons for this are extremely heavy taxes on coffee and a weak infrastructure. Farmgate prices are estimated to be only about 25-35% of export unit values. Unless these problems are addressed, production and exports will likely experience a slow decline. 25. As in any industry, coffee production and exports will increase in countries where appropriate incentives and technological improvements are provided to farmers. As the brief discussion above suggests, differences in  -8- productivity and production growth among producing countries are expected to widen. In sum, the world coffee market is likely to become increasingly more competitive for many of these countries which have been doing poorly in past years. Countries with high average production costs may consider adjusting their macroeconomic policies, including real exchange rates, to cope with low world coffee prices that may last several years. Unless such policies are taken, uprooting of trees and neglect of trees may occur, requiring large investments over a long period of time. Demand Outlook 26. It has been assumed that the ICA will remain in force over the projection period and that the export quota system will remain the main economic instrument of the Agreement. Forecasting demand for coffee therefore involves making a forecast of the price range and the global export quota to be adopted, as well as forecasting growth in the nonquota market and domestic consumption in producing countries. These forecasts were generated using the World Bank's revised global model of the coffee econom-y, which is capable of simulating the global market with and without the export quota. Following these exercises, it is projected that the global quota will increase at 1.51 p.a. between 1989 and 2000. The nonquota market demrand is expected to grow at 2.6% p.a. This gives a total export growth rate of 1.63% p.a. for this period. 27. Among the countries in the quota market, Japan is expected to increase its import demand at a high rate--3.5% p.a. This strong growth rate is mainly due to the high income elasticity for coffee (see Table 2). Other quota market countries which are expected to show relatively high demand growth rates are the United Kingdom, Australia, Austria, and New Zealand. The EEC as a whole is expected to increase its demand at the rate of about 1.7% p.a. in the 1990s. Other West European countries are also expected to increase their demand at 1.7% p.a. This slower growth is due to the fact that per capita conaumption in most Western European countries is already high. 28. An important influence behind the slow increase in world coffee demand has been declining demand in the United States at a rate of 1.6% p.a. over the last 16 years. Demand growth is projected to stabilize. This change in trend is expected because real coffee prices are projected to be low and the population growth rate is projected to be relatively high for the period 1987-2000. 29. The 2.6% p.8. growth rate forecast for the nonluota market is lower than in the past mainly because the non-market economies and the oil-exporting developing count.es are expected to grow less rapidly than in the 1970s. 30. Examination of recent demand trends in the major consuming countries shows soluble coffee consumption declining relative to roasted coffee consumption. Even -n countries where demand for soluble coffee has been high, such as the United Kingdom and Japan, a switch to roasted coffee appears to be in progress. Persistence of this trend would increase he size of the discount of robustas as compared to arabicas. As the trend is relatively recent, we have used the global model to make a prediction of the average price differential between arabica and robusta coffees. The average discount  -9-. TABLE 2: 1XAMD KLASTICITIKS FM COFFEE -Elasticities- -Elasticities- Importing Countries Income Price Importing Countries Income Price ----------------------------------------------------------------__-----------_ Belgium 0.36 -0.28 Australia 1.72 -0.37 Denmark 0.58 -0.43 Austria 1.30 -0.54 France 0.68 -0.13 Finland 0.34 -0.08 Germany, Federal Republic of 0.98 -0.17 Canada 0.28 -0.13 Greece 0.52 -0.49 Japan 2.03 -0.31 Ireland 2.89 -0.34 New Zealand 1.28 -0.13 Italy 0.92 -0.18 Norway 0.26 -0.14 Ne. ierlands 0.89 -0.34 Sweden NA -0.29 Portugal 0.62 -0.28 Switzerland 0.56 -0.24 Spain 1.07 -0.07 Yugoslavia NA NA United Kingdom 1.26 -0.51 United States NA -0.46 ----Elasticities-- Selected Producing Countries Income Price a/ Brazil NA -0.09 Colombia 0.41 -0.14 India 0.24 NA Indonesia NA -0.07 Mexico NA -0.14 --------------------------------------------------------------------__-------_ NA - A significant coefficient was not able to be estimated. a/ Note that due to the unavailability of retail price data, the international coffee price in terms of local currencies and deflated by the local cPr was used instead. For this reason the price elasticities presented here are probably an underestimate of the true price elasticities of demand for these producing countries. Source: World Bank.  - 10 - expected is 15Z. However, the discount may be larger in the late 1990s if the recent trends in consumption continue. 31. Consumption in the producing countries as a group is expected to increase at 2.3% p.a. in the 1990s. Growth rates a-e likely to be highest in countries where production and population growth rates are expected to be highest. Among the major producers the foliowing annual consumption growth rates are expected: Brazil (2.2%), Colombia (2.9%), Mexico (1.1%), and Indonesia (1.8%). Price Outlook 32. Assuming continuation of .he ICA, prospects for world coffee prices will be tied to future levels of the global export quota. Under the assumption that the global quota increases at 1.5% p.a., the projected prices are those given in Table A5. Prices wk 1d be lower if demand growth rates are lower than forecast a ove or if the global quotas increase at a higher rate than assumed. 33. To evaluate the effects on world prices of different GDP growth rates in importing countries and different global quota growth rates, two additional simulation runs were made with the coffee model. One had GDP growing at 0.5% p.a. lower than the base case and the global export quota increasing at 1.7% p.a., the other had the GDP growing at 0.5% D.a. higher than the base case and the global quota increasing at 1.3% p.a. The results are given in Table 3. 34. As the simulation results in Table 3 show, the differences in projected prices widen substantialLy with time. Large price differences under the two alternative scenarios are a result of low price elasticities of demand. Thus prices are considerably higher when the secular demand trend is higher and the quotas lower. The figures in Table 3 also show that real world coffee export revenues are likely to increase at a modest rate in the 1990s-- about 1.5% p.a. in the base case and 2.3% p.a. in the "high GDP growth and lower quotas" case. 35. A simulation was also carried out for the case in which the quota system is discontinued in 1990. The results are also shown in Table 3. After removal of the quota the initial decline in prices is large (about 35%), because exporting members with accumulated stocks will reduce them, depressing prices. However, with time the price difference narrows as the excess stocks are exhausted and world exportable production declines. In fact, by 2000, prices are only about 2% lower than the base case iri which quotas are still in effect. However, over an even longer period these prices would no,. last because they would encourage higher production and exports. Policy Issues 36. International Coffee Agreement (ICA). The current ICA expires at the end of September 1989. Prolonged discussions over renegotiation of the Agreement are likely. To allow sufficient time for discussion, some expect the current agreement to be extended for a year or two.  - 11 - TABUE 3: PIOJECTD PRICtS a/ UNDER ALTERNATIVE SCENARIOS High CDP Growth Low GDP Growth Without Quotas Year Base Case and Lower Quotas and Higher Quotas from 1990 -----(1985 USC/kg)