Reuters reported that a number of commodity traders are suing coffee farmers in Brazil that have failed to deliver agreed orders.
The price of Arabica has increased to record heights over the past few months, and this has tempted some coffee farmers to default on their contracts with the traders and sell to new buyers at better prices.
Fernando Bilotti Ferreira, a partner at Santos Neto Advogados, said the firm is working on 30 lawsuits related to coffee defaults. He said he is acting for four trading houses, but wouldn’t name them.
However, it is believed that some traders are seeing defaults in about 5% of their contracts. Not all of these are going to court, the companies try to mediate first, and in some cases are accepting a postponement of contracts until 2022.
The incentive to default has never been higher (and) these guys are not just defaulting on one (season’s) crop. You’re looking at the tip of an iceberg here. It will get worse over next 12 months or longer.
European Trader for a large trading house speaking off the record.
It’s understandable on one side, for many coffee farmers who have never been paid well, and many of whom suffered from the frost, now to seize the chance to lock in some financial security. But the traders are not going to walk away from big losses, and they’re not going to forget those farmers who broke contracts, and this makes me concerned about the situation those same farmers will find themselves in perhaps 2 years from now, when they may find it hard to sell their crop on advanced contracts.
In other cases, there are reports of bizarre situations, such as traders getting court orders allowing them to search farms, with the assistance of law enforcement agents, to locate the “missing” 60kg bags of coffee.
We wonder if some coffee farmers have been falsely reporting to the traders that they cannot fulfil the contract because of the bad weather while preparing to sell the coffee to a new purchaser.
We have heard of satellite’s being used to take images of crops so that traders can assess if they have been damaged, and whether they are being told the truth.
Many cases do not make it all the way to court, but it’s understood some of the transactions involved are valued at over $1m.
We managed to negotiate and find a solution in most cases. Only in cases when talks ceased we resorted to the courts.
Nicolas Rueda, North and South America director, Volcafe.
The problem is not isolated to Brazil. Ethiopia and Colombia also have seen defaults. In a recent visit to our local roaster, we were told that they were experiencing trouble getting a hold of coffee from Ethiopia. They explained to me that Their brokers just can’t get it.
Considering the increase in shipping costs of 400%+, many in the industry believe that the situation will remain the same in the short and medium-term.
