The impact to traders of the countries poor harvest and shipping constraints may be enough to force some coffee traders to close.
About 10% of the expected coffee sold in advance to traders has not materialized, leaving them with the choice of carrying the contracts through another year, or crystalising their losses now and writing them off on the accounts. Most are choosing the latter if they can afford it.
Traders are feeling bearish about the countries ability to deliver later – about 1 million bags are currently in default for delivery. As prices have risen steeply, peaking around 55% over last year, traders will be forced to fill their contracts by buying coffee at the current market price, even though the price they have agreed to sell it on at, is much lower.
Although there are ways to hedge a future trading position, a default by farmers on delivery negates those strategies. Some traders estimate their losses will be in the range of $8m – $10m, enough to force some into closure.
Most of the countries exporters and the rest of the supply chain is also looking at losing money. But the heaviest losses will possibly be borne by the FNC. Colombia’s Growers Federation.
In the recent past, farmers have fared better by selling their coffee to traders using futures contracts, which lock in the price. This is because prices had been going down, so the farmers were better off. This year, however, that strategy has backfired, catching out farmers, exporters, and traders alike.
Roasters involved in direct trade could also be impacted, and are now reconsidering their single-origin Colombian coffees with a view to either blending or replacing them.
