As a result of Colombian farmers defaulting on agreements, global roasters intend to change the branding on their 'single-origin Colombia' coffees, as sourcing from the South American country continues to be problematic. Defaults by Colombian producers could put further pressure on global coffee prices. However, when Colombian farmers release the coffee back onto the market, prices could dissipate. Colombian farmers are expected to deliver the coffee in late 2021 or early 2022.
Many traders could opt to concede losses and write off purchases as defaults compared to waiting and risking more significant losses if growers fail to deliver next year and prices continue to rise. Several global trade houses are expecting to lose between USD 8-10 million each on undelivered coffee. The National Federation of Coffee Growers of Colombia (FNC), representing Colombian coffee farmers and accounting for 20% of the country's 12.5 million bags of annual coffee exports, expects to face millions of dollars in losses.
Delivery defaults in the global coffee market have a significant impact on exporters and traders, who usually hedge purchases by taking short positions in the futures market, causing them to sustain huge losses as prices increase. Typically, traders would sell the physical coffee they are owed at current inflated rates to offset their losses in the futures market. However, in the event of a default, traders are unable to offset their losses. Defaults can also push traders to obtain stocks pre-sold to roasters at a loss in the pricey spot market.
According to FNC, major trade houses face defaults, and heavy losses are expected throughout the supply chain. The FNC has given Colombian growers one year to deliver the coffee. This time frame could lead to the industry body approaching the Colombian government for bail-out funds if the farmers fail to meet the deadline.
In Colombia, pre-contracts for coffee have become popular in recent years. However, until 2021, this arrangement had been successful as global prices drifted lower, allowing farmers to secure better prices for their coffee on delivery. Approximately 550K Colombian families make their living farming coffee, and the country is the leading producer of the washed arabica coffee on which benchmark futures contracts on the Intercontinental (ICE) exchange.