A Cartel of Two

The receiving station at Gouyave is a long shed on the west coast with a floor of concrete and a smell that gets into clothing. Growers arrive with sacks. The nuts are tipped into water, because a nutmeg that floats has dried out or been eaten from the inside and a nutmeg that sinks has not; the sinkers are graded, the shells are cracked, the red aril is peeled off and dried separately and sold as mace. The building is owned by the people bringing the sacks. It has worked this way for the better part of eighty years.

That arrangement is why, in 1987, a Caribbean island of roughly a hundred thousand people was able to sit down with Indonesia — then and now the largest nutmeg producer on earth — and negotiate as something close to an equal. The two of them signed an agreement to hold prices up between them. It is one of the very few commodity cartels ever attempted with only two members in the room, and the way it fell apart is more instructive than the way it was built.

One island, one seller

Nutmeg is native to the Banda Islands in eastern Indonesia and reached Grenada in the 1840s, where it found volcanic soil, altitude and rainfall that suited it. It is grown here by smallholders on plots of a few acres, interplanted with cocoa and banana under shade — thousands of separate farms, which under normal conditions is the definition of a producer with no bargaining power at all. What changed that was an ordinance passed in the 1940s creating the Grenada Co-operative Nutmeg Association and giving it a statutory monopoly on export. Every grower on the island had to sell through it, and every grower on the island owned a share of it. Farmers were paid an initial price on delivery and a bonus later, once the crop had actually been sold abroad. The co-operative was, in the language of agricultural economics, a single desk — and unlike most single desks in the region, which were state marketing boards that eventually collapsed under political interference, this one belonged to the producers and survived.

The agreement

By the mid-1980s Indonesia and Grenada between them accounted for something close to nine-tenths of the nutmeg and mace traded in the world, and both were unhappy with a price set entirely by buyers in Rotterdam and New York. In 1987 they formed the Association of Nutmeg Producing Countries and agreed to do what cartels do: set floor prices, allocate export quotas, and withhold supply when the market fell below the floor. Prices rose steeply over the following two years — by most contemporary accounts to several times where they had been.

A cartel is only as strong as its weakest seller. Grenada had solved that problem forty years early, by law, in a shed at Gouyave where every grower on the island had to bring the sacks.

Why it came apart

The asymmetry was fatal and it was obvious from the start. Grenada could enforce a quota with a stroke of a pen, because there was exactly one legal exporter and it was the one signing the agreement. Indonesia could not. Nutmeg there is grown by many thousands of smallholders across Maluku, North Sulawesi and West Sumatra, selling to competing private traders who buy, blend and ship, and no ministry had a mechanism to stop any of them from taking the higher price and adding volume. Withholding supply raises the price, and a raised price is precisely the incentive to sell more of it. That is the standard failure mode of every commodity cartel, and it is why the successful ones tend to have very few sellers or very heavy state control of exports. By the early 1990s the arrangement had effectively stopped working. Indonesian deregulation of the trade removed what leverage Jakarta had, buyers waited it out, and the price went back down to something like where it had been — except that both countries were now sitting on the stock they had held back.

Who carried the warehouse

This is the part that matters if you are standing in Gouyave. Withholding supply is not free. Somebody has to own the nutmeg that is not being sold, insure it, store it, and wait. In Grenada that somebody was the co-operative, which is to say the growers themselves — the same people who receive their money in two parts, an advance on delivery and a bonus when the crop clears. Stock sitting in a warehouse is a bonus not paid. The mechanism that made Grenada strong enough to join a cartel was the same mechanism that pushed the cost of the cartel down onto farmers with a few acres each, and it stayed there for years afterwards as the overhang was worked off.

What the storm settled

The oversupply problem was eventually solved by a hurricane. Ivan crossed the island directly on 7 September 2004 and destroyed something in the order of ninety per cent of the nutmeg trees. A nutmeg tree takes seven to nine years to bear and far longer to reach full production, and it is dioecious — you cannot tell a male from a female until it flowers, so a replanted orchard is a decade of work before you know what you actually have. Grenada went from being the counterweight to Indonesia to being a minor supplier beside it, and it has not come back.

The co-operative is still there, and so is the shed, and the argument has changed rather than ended. The interesting question in Grenadian agriculture now is not volume but where in the chain the money is captured — which is why the island's cocoa is increasingly made into chocolate here rather than shipped out as beans, and why the same logic is being applied to nutmeg oil and mace. A cartel is an attempt to change the price you are given. Processing is an attempt to stop being given one. The second is slower, and it does not require anyone else to keep their word.