Over Production Takes Its Toll.
Latin America and Brazil in particular have always been major suppliers of coffee and at the beginning of the 20th century things were going so well that amount of coffee being produced far outweighed what was consumed worldwide. This over supply led to a major price drop, driving the price per pound down to a mere six cents. Since this low price was decimating the growers of the coffee it led to a scheme in 1906 called valorization. This scheme entailed the producing countries governments purchasing coffee and then warehousing it, thereby reducing the total supply available.
Unfortunately for Latin America they didn’t have enough funds to keep this scheme going for very long on their own. This is when, according to the book Uncommon Grounds, they turned to a man named Hermann Sielcken, who was a ruthless business mogul of the time. The deal they struck with Sielcken while beneficial at the time would eventually cause the producing countries to lose control of the warehoused coffee. The terms worked out meant that Sielcken and his consortium never paid more than 5.6 cents per pound for the coffee and in addition this money was considered a loan, which was charged interest at 6%. That wasn’t all of it though the Brazilians were also on the hook for annual storage costs and a 3% commission as well.
By 1908 there were nearly 7,000,000 bags of green coffee beans sitting in warehouses around the world waiting for prices to escalate. Soon Sielcken again offered up another loan, this time for consolidation of the debt incurred by the producers. In the terms of this new loan all 7 million bags of warehoused coffee were placed under the control of a seven person committee, with only one of those positions belonging to the producer. They had now effectively lost control of their product.
Eventually valorization did have the effect of raising the price of coffee and by 1911 it soared to over 14 cents per pound. This steep price rise from 6 cents to 14 caused the US government to began to take an interest in Mr. Sielcken’s dealings and not in a good way. After a long drawn out battle with the government the case against was eventually dropped leaving him with the millions he made on the scheme.
It wasn’t all bad though, it’s quite likely that valorization prevented many bankruptcies from occurring and possibly even a revolution in Brazil. It’s also quite obvious that Mr. Sielcken and his consortium did very well also but left Brazil in massive debt. By 1917 though Sielcken had died and new litigation started over the distribution of his fortune.