International companies are expanding in Vietnam, the world’s largest producer of robusta coffee, to ensure supplies after local traders failed to fill contracts, according to Louis Dreyfus Commodities SA.
Disputes between exporters in growing countries and members of the Swiss Coffee Trade Association increased after prices jumped as much as 55 percent in the past year, said Nicolas Tamari, head of the Geneva-based association. There may have been “some movements in timing” on contracts and “we can’t say who is right and who is wrong,” Luong Van Tu, chairman of the Vietnam Coffee & Cocoa Association, said by phone Oct. 7.
Vietnam became the world’s largest producer of robusta in 1997-98, displacing Indonesia, and was the second-biggest for all types of coffee by 1999-2000, according to the U.S. Department of Agriculture. Vietnam’s crop doubled since 1999- 2000 as roasters sought to cut expenses by using more robusta, which costs about 60 percent less than the arabica preferred by Starbucks Corp., the world’s largest coffee-shop operator.
“The continued defaults by Vietnamese exporters have only served to accelerate the process of multinational companies processing in Vietnam, particularly in the last 12 months,” said Trishul Mandana, managing director of the coffee unit at Louis Dreyfus in Geneva. “Today, the only way in which multinational companies can guarantee that they have secure supply for their roaster clients is by sourcing themselves.”
Dreyfus handles 8.5 million bags of green coffee a year, according to its website. Vietnam’s exporters delayed or canceled as much as 60,000 metric tons of coffee shipments in June and July, Jan Luehmann, head of trading at Sucafina, a Geneva-based coffee trader with offices in Vietnam, said in July. Robusta climbed as much as 55 percent in the past year on the NYSE Liffe exchange in London.
“I don’t want to answer you on whether it is a postponement or default because there are contracts that were signed for delivery in future months,” said Luong Van Tu of the Hanoi-based coffee and cocoa association. Its 80 members include local units of London-based Armajaro Holdings Ltd., Louis Dreyfus, Neumann Gruppe GmbH of Hamburg, Noble Group Ltd. and Olam International Ltd., according to its website.
Coffee production in the Southeast Asian nation will climb to a record 22 million bags of 60 kilograms (132 pounds), or 1.32 million tons, in the season that started this month, Volcafe, the coffee unit of commodities trader ED&F Man Holdings Ltd., estimated in August. That compares with 20 million bags in the 2010-11 season, it said.
If coffee exporters don’t meet contracts, “the logical consequence is an expansion in origination by international coffee merchants,” said Jan Kees van der Wild, managing director of Volcafe in Winterthur, Switzerland.
“Every year we have had defaults from Vietnam, but with the market volatility so high, I believe people are getting hit much harder financially,” said Renaud de Kerchove, the managing director of coffee in Europe, Middle East and Africa for Ecom Agroindustrial Corp., a commodity trading company.
“The big change this year is that larger companies are not honoring contracts and more traders are being hit,” de Kerchove said from Pully, Switzerland.
The reported increase in contract disputes has yet to mean more applications for arbitration in London, said Angus Kerr, the owner of Coffee ag, a trading company in Cobham, England. Kerr is a member of the panel of arbitrators at the British Coffee Association. That may be because traders assume the arbitration will be unenforceable, he said.
Ecom resorted to arbitration last year and never received compensation, de Kerchove said. Dreyfus won six arbitrations in the past 12 months and none has been fulfilled, Mandana said.
“The defaults by the exporters are serving to destroy value for the Vietnamese farmer,” Mandana said. Buyers are beginning to “price in ‘default risk’ into the prices paid.”
To contact the editor responsible for this story: Claudia Carpenter at Ccarpenter2@bloomberg.net.