By Peter Murphy
BOGOTA, March 5 (Reuters) – Some arabica coffee buyers in Colombia have ripped up supply contracts with exporters, setting off a price war for high-quality beans in the first sign a 75 percent surge in prices so far this year is starting to disrupt the market, exporters say.
Trading houses have been forced to scramble to source spot supplies at far higher costs after middlemen, a small but crucial group of traders who source coffee from farmers, defaulted on supply contracts amid wild price volatility.
The defaults in the world’s No. 1 washed arabica producer will add to unease in the coffee market amid arabica’s biggest rally in decades and could mark the start of problems the physical market has been bracing for as a prolonged drought and devastating fungus damage crops in Central and South America.
News of strains in the market also comes after the International Coffee Organization (ICO) warned this week that the global market could flip into a deficit this year for the first time in five years.
To be sure, there have been no reports of defaults by exporters and the supply squeeze in Colombia will likely ease as the ‘mitaca,’ or mid crop, gets under way in the coming weeks. The country is expected to produce a large crop of about 11.3 million 60-kg bags this year
But it may feed fears that at worst, delays or defaults on domestic contracts could force exporters to walk away from their own commitments, which would shred trust they have earned with importers and roasters in the close-knit industry.
With crops in Central America and Mexico down due to the roya or leaf rust fungus and Brazil’s farmers bracing for losses due to the devastating drought, some fear roasters may have few alternatives for Colombia’s washed, mild arabicas.
SUPPLY DEALS DITCHED
A trader at one exporter said he was now engulfed in “a big price war” as some middlemen commit batches of coffee to one bidder after another, ditching the deals each time a better offer comes along.
He said smaller exporters would be most vulnerable to defaults as they lacked the deep pockets of large trading houses to secure supplies in the fiercely competitive market.
From afar, U.S. traders worry that arabica’s breathtaking rally could trigger a wave of defaults along the supply chain.
“High prices, and especially in markets that move this quickly, bring about all kinds of problems, one of the biggest being defaults,” said Bob Phillips, president of Caturra Coffee Corp in Elmsford, New York.
Phillips buys primarily from Brazil and said he hadn’t experienced any delivery problems so far.
On Thursday, contracts traded on New York’s ICE futures exchange retreated back below the $2 per lb they had hit on Wednesday for the first time in two years, to $1.96 per lb.
In some cases, as much as half of the coffee contracted via middlemen failed to turn up, traders said.
“This weekend we had to go to get it ourselves,” said a trader at one local exporter. His staff had to buy directly from farmers after his supplier failed to deliver beans they had forward sold before the surge, at lower rates.
Rising 75 percent so far this year, arabica coffee is by far the best performer on the Thomson Reuters/CoreCommodity CRB Index .TRJCRB, trailed by lean hogs in second place, which have risen 29 percent.
COLOMBIA MID-CROP COMING
Any stumbling on contracts would put further strain on roasters and traders who are now forking out twice as much for their beans as they would have in November when prices were at seven-year lows close to $1.
“I think some intermediaries went ‘short’ at the beginning of the year. … The rest are just trying to take advantage of the situation and make money from it,” he said.
Defaults by exporters are rare given the strong incentives the companies have to fulfill their contracts. The cotton trade is still working through a backlog of legal disputes after defaults in 2011 when prices quite suddenly doubled.
“We lose out by buying coffee at a higher price, but it is worse to not fulfill your contract and have claims against you and see your reputation suffer,” said the trader at a multinational exporter based in Bogota.
(Additional reporting by Marcy Nicholson in New York; Editing by Jonathan Oatis)