The Southern Boom
As is invariably the case when prices reach extreme levels, either high or low, the pendulum swung back rapidly in the other direction. Based on the unprecedentedly low prices, the so-called "cotton crowd" started what was generally known as "the southern boom". Various cotton traders in New York and the South, under the leadership of D.J. Sully, the one-time "cotton king", and ably assisted by prominent local coffee firms, became extremely active on the buying side; and by February, 1904, they had forced the price up to eleven and eighty-five hundredths cents. This figure, the highest since 1896, was reached on February 2, which proved to be another day of enormous speculative dealings, involving roundly 462,000 bags. This marked another turning point; the three succeeding days of record-breaking operations on the Exchange witnessing a break of roughly two cents. Mr. Sully went on a vacation on February 3, and the Sielcken interests sold on a large scale. Business for that day was placed at 555,000 bags, closing prices being about one-half cent lower. This brought on enormous liquidation by western bulls on the following day, approximately 500,000 bags. As a result, prices lost twenty-five to sixty-five points on a turn-over of about 642,000 bags. All records for business were smashed on the following day, February 5. The official record was 689,000 bags, but trade estimates made it more than 1,000,000 bags. On that day, southern interests liquidated heavily, causing net losses of eighty to ninety points. Doubtless the break would have been more severe had it not been for buying by the Sielcken people and several other strong interests at and below seven and one-quarter cents for September contracts.
The Story of Valorization
The valorization, or equalization, of coffee originated in Brazil. When the original plan was threatened with disaster, Hermann Sielcken stepped in and saved the Brazil planters from ruin; the Brazil government from possible revolution; and, incidentally, won for himself and those who were his partners in the enterprise much unenviable notoriety.
The principle of valorization is generally conceded to be economically unsound, because it encourages overproduction. And valorization in Brazil would have been a failure, had it not been for a fortuitous combination of short crops, Hermann Sielcken's genius, and the World War. Because of the lessons learned in this experience, Brazil's subsequent valorization enterprises have run more smoothly.
A rapidly increasing world demand, a wonderfully fertile soil, and cheap labor kept the Brazil coffee industry in a flourishing condition nearly to the close of 1889. Coffee consumption was increasing, especially in the United States. By April 1890, the average import price per pound of Rio No. 7 in this country was nineteen cents; and Brazil was supplying only about half our needs. Virgin soil was still available in Brazil, and immigration furnished all the needful labor. Easy profits led to increased investment and careless methods. Her planters were drunk with prosperity. For six years, nearly all the three million inhabitants of São Paulo, Brazil's largest coffee producing state, "entirely gave up planting corn, rice, beans, everything they needed. They bought them because coffee was so immensely profitable that they put all their labor in coffee."
Brazil had been going through a period of low exchange. Paper money fell below par. The exaggerated issues of it, which provoked the collapse of exchange, suddenly endowed Brazil with an abundant circulation of money. Production was enormously stimulated. New undertakings sprang up on every hand. Armies of agricultural laborers were recruited in Europe and shipped into the coffee districts. And then, to make the story short, supply passed demand, surplus stocks began to appear, prices began to fall, and fell until they dropped below the cost of production.
It was in 1896–97, when the new trees came into bearing by the tens and hundreds of thousands, that São Paulo's folly began to tell. By October of that year the price of Rio No. 7 in New York had fallen to about seven cents. The decline continued, until, in 1903, it hung around five cents. Then began the winter of São Paulo's discontent. Too late, the state government tried by taxing new coffee estates, to force the planters to raise crops to supply their own necessities. The times grew harder.
Mortgages held by large coffee houses and bankers were being foreclosed. The industry was passing into European hands. The smaller planters were becoming desperate; and desperation is only a step from revolution. The government of the state of São Paulo knew this; and to save the state, it finally promised it would buy the next coffee crop, and would hold it for the planters at such a price as would be necessary to continue the industry. The protagonists of this plan to valorize coffee were Dr. Jorge Tibiriçá, Dr. Augusto Ramos, and Dr. Albuquerque Lins.
During all the period covering São Paulo's rise and fall in coffee, the financial genius who was to lead her again into the land of plenty had been quietly acquiring a knowledge of her problems—also, the ability to make money out of their solution.