Ethiopian Coffee Defaults Risk Giving Buyers Bigger Headache
(Bloomberg) -- Coffee’s surge has prompted some Ethiopian suppliers to default on deals made when prices were lower, people familiar with the matter said, potentially worsening sourcing headaches for traders and roasters.
Futures jumped about 80% in New York this year after drought and frosts hurt Brazilian crops and shipping disruptions affected supplies from other key producers like Vietnam and Colombia. Ethiopia, Africa’s top grower and second-biggest exporter, is expected to ship out a record amount of beans this season.
But some Ethiopian exporters have been unable to meet contracts agreed with international buyers when prices were much lower, said the people, who asked not to be identified because the details are private. That’s either because farmers are now asking for more money, or because local exporters have been caught out by coffee’s rapid rally, the people said.
Adugna Debela, director general of Ethiopia’s coffee and tea authority, said the government would step in to enforce contracts if parties failed to agree.
Arabica coffee futures are at the highest in a decade, adding to inflation pressures for consumers hit by high food and energy costs. Some South American coffee producers have also defaulted on contracts, exacerbating financial stress for coffee companies short on supplies.
“The default situation in Ethiopia is something we have been watching for a while, it’s not quite as bad as in Brazil or Colombia, but I don’t think it will take much for it to get there,” said Geordie Wilkes, head of research at broker Sucden Financial in London.
Arabica rallied as much as 5.8% in New York on Tuesday to the highest since October 2011, before trimming some of the advance. Robusta-coffee futures climbed as much as 3.4% in London, also touching a decade high.
Commercial participants in the coffee market are holding one of the biggest net-short positions on record, the latest U.S. government data show. Those holders are increasingly coming under pressure the higher prices go, and could further push futures up if they’re forced to close out those positions.
“We’re seeing roasters scramble to get product and the gross commercial short is really the worrying thing -- there are still so many shorts in the market and it looks like they’re over-hedged,” Wilkes said.
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