By Marcelo Teixeira and Maytaal Angel

NEW YORK/LONDON – Commodities traders Louis Dreyfus and Olam are pursuing legal action against hundreds Brazilian coffee farmers whose inability to fulfill preagreed sales terms has exposed the merchants to losses. Sources and documents reviewed by Reuters indicate that these lawyers have taken legal action against several hundred of them.

    Arabica coffee prices have rallied some 60% this year due to climate turmoil in Brazil. This price rise has caused farmers to default on their sales. It tightened supply for a commodity which, as many other commodities, was affected by delays in shipping and lower availability of labor.

Brazil, Colombia, Ethiopia, are three of the largest producers of arabica in the world. Due to increased defaults, farmers have failed to deliver coffee at their agreed prices and can resell them at current higher prices.

    Lawyers told Reuters this is the first time in decades that scores of coffee farmers are defaulting in Brazil, which grows about half the world’s arabica beans. Soybean defaults are also rising in other commodities, such that merchants resort to satellites and deploy lawyers to pursue farmers who try to resell crops already guaranteed, since prices have also risen in this market.

Brazil’s courts are often not open to the public.

Volcafe, the coffee trading arm of ED&F Man, one of the world’s largest commodity trading firms, has had problems with about 5% of its contracts in Brazil, according to the company’s North and South America director, Nicolas Rueda.

    “We managed to negotiate and find a solution in most cases. “We only resorted in most cases to the courts when negotiations had ended,” he stated, not naming the specific cases that the firm was involved.

    Olam confirmed cases of non-compliance and legal action but said they are not widespread. Louis Dreyfus declined to comment.

Colombian and Ethiopian farmers are defaulting as well, being the two largest producers of arabica in the world. Together with Brazil, these three countries make up more than half of the global arabica supply.

    “The incentive to default has never been higher (and) these guys are not just defaulting on one (season’s) crop. Here, you’re only seeing the tip. It will only get worse within the next twelve months.” said an EU-based trader for one of the biggest coffee traders in the world, but he was not permitted to discuss the issue publicly.

Two other traders from around the world said that forward sales volume in Brazil has plunged as a result of both shipping delays and defaults. This is exacerbated by already limited global coffee supply.

    The high rate of defaults could push futures, already near seven-year peaks, up further as the market depends on forward selling from Brazil to temper price rises, said a second Europe-based trader at a global merchant.

    “There should be a continuous flow of (sales) from Brazil but everything’s shut down. It’s quite scary to see how silent it has become. It’s impossible to buy coffee. “Our middleman cannot get his coffee,” said he.

    “Put together with (shipping) issues, the defaults mean the availability of coffee in the U.S., Europe and Japan is getting more and more tenuous,” he said.

    Evidence of the tightness can already be seen in ICE (NYSE:) exchange stocks, which have fallen some 11% over the past month alone. They are reliable and cheap relative to physical markets.

Fernando Bilotti Ferreira is a partner of law firm Santos Neto Advogados. He said that the company works on approximately 30 cases related to coffee defaults. Although he claimed he was acting for four trading companies, a partner at the firm declined to identify them.

There are a variety of default sizes, from 500 to 4,500 bags. Contracts for 4,500 bags are worth about 5.8 million Raise ($1.03million) at current market prices.

Cristiano Zauli, an attorney from Minas Gerais (the largest producer of coffee in Brazil), said that many traders have accepted farmers’ demands to delay deliveries until 2022. According to him, he has participated in more than 100 coffee court cases this year. He also acted as mediator in many other pre-trial discussions.

Zauli did not identify any of his clients.

FOUNDING COFTEE

    Buyers who filed court cases are seeking legal orders allowing them to get their coffee from farms with the help of law enforcement officers, according to court documents in the states of Sao Paulo and Minas Gerais.

Olam was required to travel to two places in one instance to recover the 750 bags that it purchased from Alfenas (Minas Gerais) farmer.

Louis Dreyfus tried to locate 1,000 bags that it had purchased from Patrocinio in Minas Gerais. According to legal filings, the lawyer for the trader told the judge that the farmer had resold coffee to local merchants, and it was then delivered to him.

Two Brazilian coffee brokers said that defaults had affected virtually all market participants including Cooxupe (the country’s largest exporter).

    Cooxupe said it normally negotiates with farmers facing problems but added it cannot “treat associated farmers differently,” meaning the rules apply to all.

($1 = 5.6146 reais)