Some of Brazil’s coffee farmers want to renegotiate sales contracts that were agreed on months earlier in order to take advantage of the sudden surge in pricing. The situation is bad enough to cause traders to fear farmers will renege on the contracts, and resell the coffee elsewhere under more favourable terms.
The bad harvest in Brazil means the demand is outstripping supply, pushing prices higher, and farmers don’t want to miss out.
The gap between some contract prices and the current market rate is not small, with the difference sometimes being nearly four times the contracted price from perhaps a year earlier. Traders would still be required to fill the contract, and in this case would have to pay the market spot rate, potentially leading to severe losses.
Although some farmers may not realise it, they are effectively shifting the ‘missed profit’ from their books, to the books of the traders, and the cost could easily run into millions of dollars.
The Brazil farmers union Sincal said they were not telling farmers to break contracts, just to renegotiate the terms considering the situation. However, while that might sound reasonable, it is at best naive since any forward purchase of coffee by a trader would have been resold with consideration of the price at the time. The extra money to the farmer will have to come from the pockets of the traders, and it is unlikely they will forget those actions quickly.
Farmers may understandably be thinking about the extra profit today, but they will find it much harder to sell the next harvest. If the price had gone down by as much, the farmers would have rightly been outraged if traders asked them to accept a fraction of the original contracted price.
As much as it might hurt to think about the lost additional profit, the farmers could instead buy goodwill with the traders and negotiate preferential terms on the next harvest for adhering to the existing contract. The purpose of these forward sales is to give farmers the certainty of a guaranteed fixed price. If they decide to pick and choose the years they want to honour those contracts, the option to use them will likely be removed by the brokers.