Exclusive, major coffee buyers face losses as farmers in Colombia fail to do so
- Traders say as many as 1 million bags of the Colombian coffee crop have yet to be delivered
- Rising prices have prompted farmers to back away from previously agreed sales
- The Colombian Coffee Association says defaults are widespread
LONDON (Reuters) – Coffee growers in Colombia, the world’s second-largest producer of arabica, have failed to deliver up to one million bags of beans this year or nearly 10% of the country’s crop, leaving exporters, traders and roasters in a fray, industry sources told Reuters. The losses are huge.
Global coffee prices are up 55% this year, mainly because bad weather in Brazil, the largest coffee producer, has prompted Colombian farmers to default on sales when prices were much lower in order to resell coffee at higher rates.
“Traders are defaulting, it’s a mess. If the drought continues (in Brazil), it’s probably 300 cents (per pound of coffee). It’s going to be chaos,” said a trader at a global agricultural commodity trading house.
He said leading global roasters are planning to rebrand their “single-origin Columbia” coffee due to sourcing issues.
A default in a major producer like Colombia could exacerbate price hikes in global markets, although these will be temporary because coffee is eventually found and will affect markets once it is resold.
Colombian farmers say they will introduce coffee later this year or next, but buyers are not convinced.
Many choose to see losses now and write off purchases as defaults rather than wait and risk bigger losses if farmers don’t deliver next year and prices rise further, according to a senior trader at another global trading house.
Many global trading companies are eyeing losses of $8-10 million each on undelivered coffee, he said, while the Federation of Coffee Growers of Colombia (FNC), which accounts for growers but also accounts for 20% of the country’s annual 12.5 Million bags, facing greater losses. .
take the hit
“There were easily a million bags of (Colombian coffee sales) futures before the market started to recover in mid-May,” the big trader said. “If you work for a multinational (trading company), your boss will say come on, we have to take the hit.”
Delinquencies in the rising coffee market are a big problem for commodity exporters and traders who often hedge physical purchases by taking short positions in the futures market, causing them to incur huge losses as prices rise.
Normally, traders would be able to sell the physical coffee they owe at the current high rates in order to offset a futures market loss, but in the event of a default, they cannot.
Defaults can also force merchants to buy supplies that were previously sold to toasters at a loss in the expensive spot market.
Roberto Velez, head of the Federal National Council, confirmed to Reuters that Colombia is facing widespread default.
“I can tell you that there are a few Colombian exporters who do not suffer (from default). All the major trading houses as well as the Federation as a major exporter, we are all suffering (losses),” he said.
“When a farmer doesn’t deliver, the whole chain goes down and you lose money,” he added.
Traders told Reuters the union had given Colombian farmers at least another year to deliver the coffee, a move that could force the industry body to approach the government for bailout money if the farmers did not deliver in time.
Two sources familiar with the matter said that a major Colombia-based coffee merchant working for Louis Dreyfus Company (LDC) has left the company in the wake of the losses.
LDC said it does not comment on organizational changes except for executives.
“Companies will have a problem with (the scale of losses), the big players will change their squad, but the smaller companies will go bankrupt,” said one senior trader.
He added that the main local Colombian exporter La Meseta has been hit hard by farmers’ defaults and is struggling to meet its supply deals with international roasters, leaving them vulnerable to losses.
La Mesita did not respond to Reuters requests for comment.
Selling coffee in Colombia has become quite common in the past few years, but until this year the move was mostly in the farmers’ favour as global prices drifted lower, and farmers got better prices for their coffee on delivery, not worse.
About 550,000 Colombian families make a living growing coffee, and the Andean country is the largest producer of the washed arabica on which the ICE exchange’s benchmark futures contracts are based.
(This story has been paraphrased to make it clear that the name of the company in paragraph 19 is Louis Dreyfus Company)
(Mital Angel reports in London). Additional reporting by Oliver Griffin and Julia Simes Cobb in Bogota. Editing by David Gavin, Veronica Brown and Susan Fenton
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