The black frost experienced by Brazil in July 2021 has thrown the coffee industry into a period of uncertainty. Prices have risen significantly since then, leading some farmers to default on their future contracts and seek buyers willing to pay higher prices.
In 2021, several major trading houses had trouble getting the coffee they had contracted in advance. Securing coffee in advance guarantees traders that they can deliver it to roasters who also expect deliveries within a certain time frame.
Bartalks reported last year that some coffee traders saw a default of 5% on their Brazilian contracts. This year, some are seeing even higher defaults. A lawyer working for one of Brazil’s five largest coffee export companies told Reuters the defaults amounted to less than 10% of the country’s total forward contracts. As the largest coffee producer in the world, however, even small percentages make a big difference.
Cristiano Zauli Advogados is one of the Brazil-based law firms that assist traders in cases against Brazilian farmers. The firm said it had filed around 50 lawsuits, compared to 100 last year.
Despite the “bad blood” between producers and traders, the latter is still willing to negotiate first before filing lawsuits, but the parties cannot always reach an agreement.
As a result, law enforcement agencies are sometimes sent to the farms to search for the missing coffee bags. Traders also use satellite imagery to scan the farms and find out if the farmers are really affected by the reported frost and drought damage or if they are simply hiding their crops while looking for a better buyer.
The 2022 harvest was smaller than expected. Coffee trees took longer to recover from the frosts and droughts of 2021, prompting some analysts to lower their forecasts by up to 4 million bags. Coffee traded for over 70% more on the C-market than two years ago.
From a layman’s point of view, it seems right for farmers to default on contracts in order to earn more from their harvest. However, some traders are already warning that they no longer trust their suppliers, which could hurt growers in the long run as it will be difficult to find buyers.
One trader, who didn’t want to be named, said they believed it would take two years before they would start trusting Brazil again for new futures contracts.
