Traders concerned on contract defaults in Brazil

Traders concerned on contract defaults in Brazil

November 8 - 2022

Coffee Geography Magazine

Traders are troubled by the defaulting Brazilian Coffee farmers who breach their agreements for a second straight year in the row which may cause trade companies to loose their profit. Last year default was occurred right after the drought followed by lengthy frosts that had damaged quite extensive amount of harvest that pushed the price to plunge drastically and farmers refused to respect the agreed contracts to the market. 

 According to the forecast, the coffee production in Brazil this year is expected to be dropped by 4 million bags as the damage from last years frost has still some impact in the over all export capacity. The farmers in Brazil want now to sell their coffee on the spot market to earn higher prices when the global coffee price is in a record low.

The situation becomes a legal challenge for international traders like COFCO, Louis Dreyfus. Olam and Sucafina as their lawyers are reviewing all the options to get compensated for damages incurred due to the breach of the contracts, according to a commodity analyst based in Sao Paulo. 

"It's going to be one or two years until traders forget and start buying forward again,” said the trade analyst. 

Brazil’s forward selling mechanism by farmers and exporters has been a market stabilizer to decrease the volatility of the commodity market which allow farmers to sell their products throughout the year not just during the harvest season. 

 Cristino Zauli, a law frim who represents traders has filed 50 lawsuits this year alone for proper compensation for failed delivery.

If the defaults continued through December before the contract expiry on Dec 19, the price on ICE may spike high out of market panic. Traders are now cautious with their international trade practice by engaging with hedge purchases with short futures positions. If they loose with a position, then they could offset it with a physical coffee prices. According to market analyst in Sao Paulo, the overall coffee trade default is less than 10 % of the total forward contract which is still be a significant amount as Brazil is the largest world coffee producer.