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As Coffee Prices Hover Near 47-Year Highs, Panic Mode Sets in for Industry

By: Alexis Rubinstein, Managing Editor - Coffee Network

As Coffee Prices Hover Near 47-Year Highs, Panic Mode Sets in for Industry 

 

CoffeeNetwork (New York) – As the C market hovers near 47-year highs, many links in the coffee supply chain have entered into “panic mode.”

As previously reported by CoffeeNetwork, in Colombia, higher margin requirements demanded by the Intercontinental Exchange (ICE) have squeezed the liquidity of both the Colombian coffee growers federation and private exporters. Margin requirements jumped from about US$10,000 per 10 lots of coffee to almost US$16,000 for the same lots of coffee amid booming coffee prices, squeezing the margins of both the coffee growers federation and some private exporters, Andres Agredo,  technical analyst at Café Trading Advisors said.

The coffee growers federation has denied the claims, while some small private exporters have confirmed the liquidity squeeze.

In Guatemala, surging prices are also showing an impact. “Our main concern as exporters are currently cash flow and the potential for producer defaults,” Daniel Montenegro, Junior Manager at Dinamica Coffee told CoffeeNetwork. “Cash flow challenges stem not only from margin calls and the high price of physical coffee, but also from ongoing supply chain disruptions.”

According to Montenegro, issues with shipping lines have made it extremely difficult to ship on time, limiting ability to rotate capital with agility and efficiency. “These factor combined are putting significant pressure on our operations,” he said.

With that said, defaults from producers are highly probable given the current market conditions. In Peru for example, it is estimated that around 100,000 bags of 60-kg have defaulted on deliveries mainly in the months of August and September, but also in October and November, a source told CoffeeNetwork previously.

“Exporters must take a more proactive and aggressive approach, purchasing coffee with cash in hand to pay and collect cherry or parchment directly from producers at the spot,” said Montenegro. “This reduces credit exposure and minimizes the risk of default.”

Dinamica Coffee in Guatemala and numerous other shave observed buyers imposing price refixation restrictions on open contacts. In response, Montenegro says that his company is strategically avoiding selling to these buyers “as such restrictions pose significant risks to dix in the case the market keeps reaching new highs.”

In a time of unprecedented levels of demand and sales, the surge in prices have caused many companies to reconsider the pace of sales. “We have adopted a cautious strategy to slow down sales in order to focus on covering shorts and ensuring stability in our operations,” Montenegro said.

While Dinamica is “fully prepared to fulfill all of our commitments, both in full and on time,” this may not be the case for others. And rumors are already spreading like wildfire on the financial standing of many firms. In a document seen by CoffeeNetwork, Ally Coffee assured their customers that they "remain financially stable and continue to operate as usual.” The memo explains that, despite the current situation in the market, Ally is fully current with their financial commitments and has not initiated any renegotiation procedures with creditors. Important to note, however, that they did specify that “some challenges may be affecting our sister companies within the group.”

Alexis Rubinstein

 

  • Coffee

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