Reuters file photo: Roasted coffee beans at a Juan Valdez store in Bogotার, Colombia, on June 5, 2019. Reuters / Luisa Gonzalez
By Mayatal Angel
LONDON (Reuters) – Colombian coffee growers, the world’s second-largest Arabica grower, have failed to deliver 10 million bags of beans or about 10% of the country’s crop this year, causing huge losses to exporters, traders and roosters, industry sources told Reuters.
World coffee prices have risen 55% this year, mainly due to unfavorable weather in top producer Brazil, prompting Colombian farmers to default on sales when prices were too low to resell coffee at high rates.
“Traders are going bankrupt, it’s a noise. If the drought continues (in Brazil), 30,000 cents (per pound of coffee) is possible. It’s going to be chaos,” said a dealer at a global agribusiness trade house.
He said top global roasters are planning to change the branding of their ‘single core Colombia’ coffee due to sourcing issues.
Delivery defaults among major producers such as Colombia could raise prices on the world market, although these will be temporary because coffee eventually exists and will weigh on the market after it is resold.
Colombian farmers say they will supply coffee later this year or later but buyers are unsure.
According to a senior trader at another global trade house, many are now seeing losses and writing off purchases by default instead of waiting and fearing even greater losses if farmers still do not deliver and prices rise further.
He said a number of global businesses are looking at losses of -10 8-10 million on unspecified coffee, while FNC, the Colombian coffee growers’ federation, which represents farmers but faces more than 20% of the country’s 12.5 million bags of annual coffee exports.
“1 million bags were easily forwarded (Colombian coffee sales) before the market started in mid-May,” said the senior trader. “If you work for a multinational (trade house) your boss will say come on, we have to hit.”
Delivery in the coffee market is a big problem for default product exporters and traders who often hedge physical purchases with short positions in the futures market, causing them to incur fatal losses as prices rise.
Typically, traders will be able to sell their due physical coffee at the current high rate to offset their futures market losses, but by default they will not be able to do so.
Default can force traders to purchase pre-sold supplies to rosters at a loss in the valuable spot market.
FNC chief Roberto Velez confirmed to Reuters that Colombia had become a massive defaulter.
“I can tell you that a few Colombian exporters are not harmed (by default). As all major commercial organizations and federations are also major exporters, we are all affected,” he said.
“When a farmer doesn’t deliver, the whole chain gets stuck losing money,” he said.
Traders told Reuters the federation had given Colombian farmers at least one more year to supply coffee – a move that could force the industry to bail out the government if farmers still did not deliver on time.
A senior Colombian-based coffee merchant with Lumis Dreyfus Commodities (LDC) has left the company in the wake of the loss, two sources said.
The LDC said it does not comment on organizational changes other than the relationship of executives.
“Companies (scale of losses) will get in trouble, the big guys will change their team, but the little guys will go bankrupt,” said a senior businessman.
He added that La Meseta, a major local Colombian exporter, has defaulted on farmers and is struggling to make good on its supply agreements with international rosters, leaving them at a disadvantage.
La Meseta did not respond to a request for comment from Reuters.
Forward-selling coffee in Colombia has become popular over the past few years, but so far this move, the move has worked mostly for farmers because world prices have dropped so farmers have gotten better prices for their coffee on delivery, not worse.
About 550,000 Colombian families make their living growing coffee and the Andean country is the largest producer of washed Arabica grade, on which the ICE (NYSE 🙂 exchange benchmark futures agreement is based.