Soaring coffee prices disrupt market, straining traders, farmers

The sharp rise in coffee prices is not only affecting consumers’ wallets but also disrupting the supply chain. Traders in Brazil’s coffee-producing regions who bet on a price drop when signing sales contracts in recent months are now struggling to fulfill their obligations. While cases remain isolated, concerns are growing in the market about a possible ripple effect.

At least four companies, all based in the state of Minas Gerais, have recently encountered difficulties. Among them are Atlântica and Cafebras, subsidiaries of the Montesanto Tavares group—one of Brazil’s largest coffee exporters—as well as Central do Café and Coocem Cooperativa Central de Muzambinho.

The crisis stems from traders who sold coffee futures contracts without physically holding the beans, expecting prices to decline before delivery. However, instead of falling, coffee prices have continued to soar in both international markets and Brazil. As a result, some companies have suffered cash flow losses, incurred financial setbacks, or defaulted on contracts.

Some farmers, too, have been affected. Farmers who delivered their coffee to warehouses under agreements for deferred payment have yet to receive their funds.

The most recent contract default involves Central do Café and Coocem, which operate jointly. Two weeks ago, the company and the cooperative suspended operations without paying approximately 380 farmers from the towns of Muzambinho, Monte Belo, Nova Resende, and Cabo Verde, despite having received their coffee.

During a meeting with coffee growers on Monday night, Creucio Carlos de Oliveira, owner of Central do Café and president of Coocem, proposed selling real estate assets to settle debts but requested a discount on the price of coffee sacks to make the payments viable.

According to farmers who attended the meeting—speaking on condition of anonymity—Mr. Oliveira claimed that financial difficulties, rather than mismanagement or embezzlement, prevented the company from making payments. Farmers had left their coffee with the cooperative for sale through Central do Café without setting a fixed price. However, they say the company sold the beans without disclosing the sale price or where the money went.

A video of the meeting, accessed by Valor, shows Mr. Oliveira saying that the company plans to sell a warehouse in Nova Resende, land in Cabo Verde, Monte Belo, and Muzambinho, a farm in Macaúbas, and several houses in town to pay off debts.

“We want you to be aware that we will pay. It won’t be at today’s market price, but it also won’t be so low that you suffer losses,” Mr. Oliveira said.

A new meeting with farmers is scheduled for March. In Muzambinho, at least two police reports have been filed by producers against the company.

“Farmers delivered their coffee, but when they went to collect their payment, Coocem was shut down. Now they don’t know if their coffee is still there or what will happen next,” said Cleber de Oliveira Marcon, president of the Rural Workers’ Union of Muzambinho. Valor was unable to contact Coocem for comment.

Other traders struggling with debt

Before the crisis at Central do Café and Coocem, coffee trading firms Atlântica and Cafebras had already begun facing financial trouble earlier in 2024. Their parent company, Montesanto Tavares, is negotiating with creditors—including banks and brokerage firms—for an extension on debts totaling approximately R$1.4 billion.

The group attributes its financial difficulties to the poor coffee harvest of 2021/22 in southern Minas Gerais. Many farmers failed to deliver the volume of coffee contracted by the company, forcing Montesanto Tavares to buy beans at higher prices in the physical market to fulfill its sales contracts.

To finance these emergency purchases and roll over its debt, the company took out advance currency contract loans (ACCs) with banks. However, as coffee prices continued rising in 2024, its financial strain worsened.

In December, Montesanto Tavares secured a 60-day court order to negotiate with creditors, who were threatening legal action over unpaid debts. This deadline was later extended by another 30 days, but it expired two weeks ago. Most recently, Banco Votorantim, one of its creditors, obtained legal authorization to seize properties and vehicles belonging to the group to recover the debt.

Fears of more defaults ahead

Industry experts warn that the crisis may not be over. Vicente Zotti, a partner at Pine Agronegócios, believes the risk of further financial turmoil remains high.

“There still seems to be more risk ahead. If coffee futures continue to climb, the risk of a short squeeze and margin calls will further tighten trading companies and cooperatives,” he said.

A short squeeze occurs when prices rise abnormally, forcing traders with short positions to buy contracts at higher prices, leading to a chain reaction of financial strain. A margin call is a requirement by the exchange for traders to deposit additional funds to cover leveraged positions.

According to Fernando Maximiliano, a coffee market analyst at StoneX, the main challenges facing traders are liquidity constraints, high interest rates, and limited access to credit.

Despite the financial distress faced by some companies, Ricardo Schneider, president of the Minas Gerais Coffee Trade Center (CCCMG), believes these cases remain isolated.

“The industry as a whole was aware of the upward trend in coffee prices and has been preparing for it since last year,” he said.

He added that exporters, traders, and warehouse operators have become more cautious, showing less willingness to buy coffee for future delivery in July, given the risks of price fluctuations due to climate conditions.

While he does not expect the crisis to worsen, Mr. Schneider acknowledged that “unprecedented financial stress” is gripping the industry, which could raise operating costs and squeeze profit margins for coffee traders.

However, one industry insider, speaking anonymously, is less optimistic and expects more defaults, given that coffee prices are unlikely to decline in the coming months.

Beyond traders, coffee roasters are also feeling the pressure. Luciano Inácio, president of the Rio de Janeiro Coffee Industry Union (SINCAFE-RJ), warned that rising costs for processing and packaging beans could soon impact the broader supply chain.

“Eventually, coffee will only be sold for upfront cash payments, tightening the entire market,” he said.

By Isadora Camargo e Cibelle Bouças, Globo Rural

Source: Valor International

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