Current Plan
Intelligence & Data Solution
Get started with Premium Plan of our Intelligence & Data Solution to get access to premium content and data in food and agriculture
Tridge analysis

Colombian Coffee Farmers Default on Agreements

Raw Common Coffee Bean
Colombia
Price Trend
Regulation / Agreement
Supply Yield / Stock Quantity
Oct 13, 2021
Written by
image
Mzingaye Ndubiwa
Share This Story
Colombian Coffee producers have failed to supply approximately 1 million bags of beans, about 10% of Colombia’s harvest, creating a deficit in global inventories and causing exporters, traders, and roasters to face significant losses. In 2021, global coffee prices surged by 55%, mainly due to adverse weather conditions in Brazil, the leading global producer, prompting Colombian growers to default on sales agreed when prices were lower to re-sell at increased rates.



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.

Traders set to face significant losses

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.

Sources:

Was this insight helpful?
By clicking “Accept Cookies,” I agree to provide cookies for statistical and personalized preference purposes. To learn more about our cookies, please read our Privacy Policy.