Memorandum of Conversation, by the Associate Chief of the International Resources Division (Cale)

Participants: Mr. Chester Bowles, Director, Office of Economic Stabilization
Mr. Walter Salant, Office of Economic Stabilization
Mr. Brainerd Currie, Office of Economic Stabilization
Dr. Emilio Toro, Colombian Delegate, Inter-American Coffee Board
Dr. Enrique López-Herrarte, Guatemalan Delegate, Inter-American Coffee Board
Mr. Cale, IR

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Mr. Cale stated that coffee production in the other American Republics is customarily characterized by very low wages and that the position of the coffee producer and the coffee laborer has deteriorated considerably since coffee price ceilings were established in December 1941 by the Office of Price Administration. He also said the cost of living in the coffee producing countries had increased to a very substantial extent since coffee price ceilings were frozen in 1941. In response to a question from Mr. Bowles as to the extent to which cost of living had increased, Mr. Cale replied that according to a recent [Page 156] study made in Bogotá, Colombia, living costs have increased from 100 in 1941 to 170 in June 1945 and that they had continued to rise since the later date. Dr. Toro added that the latest cost of living index figure for Bogotá which he had received was 196. Mr. Cale stated that with such increases of cost of production and cost of living since coffee price ceilings were frozen it is easy to understand that the coffee producers are up against a very difficult situation.

Mr. Cale called attention to the fact that no price action at all in respect to coffee had been taken up until last November, at which time a subsidy of 3 cents per pound was placed in effect for the period ending March 31, 1946. He said that virtually all the coffee under this subsidy had now been purchased for approximately a month and that sales since that time had been at an almost complete standstill. In response to a question from Mr. Currie as to whether or not any coffee had recently been purchased at non-subsidized prices, Mr. Cale, Dr. Toro and Dr. López replied in the negative and expressed the view that no coffee would be so purchased. Mr. Cale stated that in view of the foregoing it was obvious that prompt price action with respect to coffee is necessary not only in the interest of coffee producing countries, but of maintaining supplies in this country. He referred to the supply situation in the United States at the time the subsidy was announced last November and said he believed it would be generally conceded that it would be extremely unwise to permit such a situation to develop again. Mr. Bowles concurred.

Mr. Cale said that of the various possible lines of action that might be taken with respect to prices, the coffee producing countries would prefer to see coffee price ceilings suspended. He pointed out that under this solution price would be determined by the normal forces of supply and demand. In this connection he stated that he felt, on the basis of the best estimates he had been able to obtain, that the amount of coffee produced in the world during the next twelve month period will exceed world requirements at present prices by perhaps 2 to 2½ million bags and that there is, therefore, no world shortage of coffee. He said that there was some shortage of mild coffee and that he believed if ceiling prices were removed they would increase to some extent over present subsidized levels in the producing countries but that he was not at all sure prices of Brazilian coffee would rise to any extent over present levels and that such increase as occurred in the prices of mild coffee would largely be in the nature of adjustments of the prices of the various types of coffee to each other.

Mr. Cale stated that because of greatly increased production costs in the producing countries ceiling prices in this country based on the cost of producing coffee at the present time would require a very substantial increase above present levels. He said that the Colombian [Page 157] study to which he had referred earlier indicated that coffee in a number of provinces in Colombia is now being produced at a loss. Dr. Toro called attention to the fact that this loss was being sustained notwithstanding the exceedingly low level of wages now being paid in Colombia. He said that the average family in Colombia consists of seven persons and that average family income for coffee producers amounts to between 12 and 14 dollars per month. Mr. Cale stated that with such low wages and such increased costs of production it would perhaps be impossible to set a coffee price ceiling in this country which would seem reasonable to the coffee producers. On the other hand, he said the statistical situation with respect to coffee is such, as he had indicated above, that no sustained substantial increase in average coffee prices would be likely to occur if coffee ceilings were suspended. From the viewpoint of Inter-American relations, therefore, the most desirable solution of the coffee price problem appeared to be suspension of the ceilings. Mr. Bowles inquired how it was going to be possible for him to suspend coffee price ceilings and impose a ceiling on the price of American cotton. He stated that the Office of Price Administration had already announced its intention of placing a ceiling price on cotton although he was not certain that the Agency would be able to go through with the action in the face of Congressional opposition. He also pointed out that there is considerable sentiment for the removal of ceiling prices for agricultural products generally. For this reason, he said, it will not be possible for him to suspend price ceilings on coffee if he expects to continue to control the price of domestically produced agricultural commodities.

Mr. Cale replied that in this event the coffee producing countries would like to see the ceilings on coffee fixed in accordance with the principles used in pricing domestically produced agricultural commodities. In this connection he pointed out that prices generally in the coffee producing countries have not been as well controlled as in the United States and that the costs of coffee production have, therefore, undoubtedly been increased to a greater extent than the cost of producing agricultural products in the United States. One of the difficulties, he said, that members of the Coffee Board have faced in explaining United States policy concerning coffee prices to the coffee growers has been the fact that coffee has not been priced in accordance with the principles followed in pricing commodities produced in the United States. Dr. López and Dr. Toro stated that the political consequences of continuing to set ceilings on coffee in an arbitrary manner are likely to be bad and urged that coffee be accorded treatment similar to that given to United States agricultural commodities. Mr. Bowles pointed out that this would involve a considerable increase in coffee prices. [Page 158] He said that recently, in testifying before Congress on the bill to renew the price control act, he had indicated in no unmistakable terms that the line would be held on foods and rents. This action he justified on the ground that it is necessary to convince Congress and the people that a large measure of stability will be maintained under the price control program. He said that any action in respect of coffee would have to be taken against this background.

Dr. López stated that he felt that the only factor given consideration in the establishment of the subsidy was the necessity to obtain supplies. He said no consideration was given to increased costs of production in the coffee producing countries or to transportation difficulties which such countries are now facing. The subsidy, he stated, has placed these countries in a very difficult squeeze, especially in view of their shortage of transportation facilities and the opportunity which the limited subsidy period has given owners and operators of such equipment to raise their rates to coffee shippers.

Drs. López and Toro also pointed out that the recent increase in freight rates on products going to the coffee producing countries had adversely affected the countries by increasing their costs of producing coffee. Mr. Bowles expressed the opinion that such action should have been cleared by his office before it went into effect.

Mr. Bowles said that at the time the subsidy was established, he felt the food situation would become much easier in a very few months and it would therefore be possible to remove a large number of agricultural products from price control by the present time. Instead the food situation has gotten tighter and it is critically necessary to maintain price ceilings on agricultural commodities. He pointed out that ceilings had been removed on oranges since the crop was one of the largest in history and it was therefore felt that there was no danger of a price increase. Actually, prices went up to a very marked degree and the ceilings had to be reimposed. On the basis of the present supply of cotton there appears to be no reason why cotton prices should continue to increase, but they are doing so nevertheless. Speculation appears to be in the air. As long as the public thinks prices are going up, and as long as traders are willing to bet on further increases, it will be necessary to retain controls even though the supply situation in respect to individual commodities may not appear to be tight. Coffee will have to continue to be subjected to controls just as will other important agricultural commodities.

Mr. Cale stated that the coffee producers would favor a price increase to an equivalent subsidy on coffee. Mr. Bowles replied that American farmers are in the same position and indicated that a subsidy is more likely than a price increase, in view of the stand he has taken [Page 159] to the effect that the food price line will be held. Mr. Bowles indicated that the coffee price problem had not recently been taken up with his office by either the Department of Agriculture or the Office of Price Administration, and indicated that he would like to have recommendations not only from these agencies but from the State Department as well before taking action. Mr. Cale said that the State Department had written to the Office of Price Administration concerning the matter several weeks ago and that a copy of that letter had been sent to the Stabilization Administrator. Mr. Bowles stated that since the question has been raised he will get to work on it promptly. Members of the Committee thanked him for giving them an opportunity to present the case of the coffee producing countries to him.

As the meeting was breaking up Mr. Bowles expressed the view that it was very important to the coffee producing countries that the stabilization program in the United States should not “blow up”. Drs. Toro and López agreed that the coffee producing countries had a large stake in the maintenance of economic stability in the United States.