After hundreds of Brazilian coffee farmers have failed to deliver the pre-agreed orders, many commodities traders are pursuing legal actions. Some of these traders include: including Louis Dreyfus, Olam, and Volcafe. They have claimed that this default in delivery has left them exposed to losses.
The climate turmoil in Brazil has increased the price of Arabica coffee by 60% this year. The price surge has tempted farmers to default on deliveries and tightening supply. This commodity, like many others, has suffered from shipping delays and a decline in labor supply. As many court proceedings in Brazil are not public, the process of these legal exercises is still unknown.
Who is defaulting?
The three largest arabica producers in the world, Brazil, Colombia, and Ethiopia, are having increased rates of default. Brazil, Colombia, and Ethiopia together produce more than two-thirds of the arabica output of the world.
Nicolas Rueda, Volcafe’s North and South America director, has stated that currently, the company is facing troubles for about 5% of its contracts in Brazil. He has also mentioned that in most cases negotiations led to a solution, and only in some cases when restoring to courts was necessary. Many traders involved in court cases have already accepted to receive their deliveries in 2020.
According to the reports, this is the first time in decades that scores of coffee farmers are defaulting in Brazil. Defaults have been observed in other commodities like soybeans as well.
One of the world’s largest coffee traders has expressed his concern and said that the recent defaults have only been the tip of the iceberg and we should be expecting much more defaults over the next 12 months. He believes that there exist high incentives at the moment for more defaults.
With Brazil default on the sales volume due to both defaults and severe shipping backlogs, the world is now facing a severe shortage in coffee supplies.
If the rate of defaults, which are close to a seven-year high, push any future, the market will completely rely on Brazil to temper price rises.
The Size of the default
As a result of the recent tightening, the ICE exchange stocks, have fallen 11% in the past months. Santos Neto Advogados is a law firm that is in charge of near 30 cases that are related to coffee defaults at the moment. The size of the defaults is estimated to be from 500 to 4,500 bags. A contract for 4,500 bags, with the current prices, is worth $1.03 million.
