By Maytaal Angel

LONDON (Reuters – Colombian coffee growers are world No. According to sources in the industry, Reuters reported that Colombia is No.2 arabica producer and has not delivered nearly 1 million bags this year. That’s almost 10% of its crop. Exporters, traders, as well as roasters are facing severe losses.

Coffee prices around the world have shot up 55% due to bad weather in Brazil. Colombian coffee farmers defaulted on coffee sales that were clinched at lower prices to resell their coffee at higher rates.

It’s becoming a disaster for traders. It is possible to get 300c per lb coffee if the drought persists in Brazil. A dealer from a major global commodity trade house said that it was going to be chaos.

Due to problems in sourcing, leading global roasters plan to alter the branding of their single origin Colombian coffees.

Delivery problems at major coffee producers such as Colombia could cause price increases on global markets. However, these spikes would only be temporary since the coffee will still exist and weigh on the markets when it is resold.

Colombian farmers promise that they will supply the coffee in due course, however buyers seem skeptical.

A senior trader with another international trade house said that many people are preferring to view losses immediately and to write off the purchase as defaults, rather than risk further losses should farmers fail to deliver next year or if prices go up.

He stated that several global trading houses could lose $8-10 million on undeliverable coffee while Colombia’s coffee growers association FNC faces greater losses. FNC represents the farmers, but it also exports 20% of Colombia’s 12.5million bags annually.

TAKE THE HIT

According to the senior trader, “About 1,000,000 bags of forward (Colombian Coffee Sales) were sold before the market began rallying in mid-May.” If you are a trade house or multinational, your boss will tell you to get the job done.

Commodity exporters and traders are concerned about delivery issues in an escalating coffee market. They often take short positions on the futures market to hedge physical purchases, which can lead them to suffer steep losses.

Normaly, traders are allowed to trade the coffee they owe at high current rates, to offset their futures loss. However, if there is a default, it’s impossible for them to do so.

Sometimes, defaults force traders to buy supplies that were already sold to roasters for a loss on the spot market.

Roberto Velez from FNC confirmed to Reuters Colombia faces widespread defaults.

I can assure you that there are very few Colombian exporters who have not suffered (due to defaults). “All the major trade houses as well as the Federal Government, which is a major exporter of Colombia are all in trouble (losses),” he stated.

He said, “When growers fail to deliver, the entire chain is stuck losing money.”

Reuters was told by traders that the federation had given Colombian coffee farmers an additional year. This could mean the sector body will have to seek out bailout funds from the government if they don’t receive their orders in the time frame.

MOUNTING LOSES

According to two people familiar with the matter, a coffee trader from Columbia who was employed by Louis Dreyfus Commodities in Columbia (LDC), left the company after suffering losses.

LDC indicated that they do not discuss organizational changes except for executives.

A senior trader stated that companies will face serious financial difficulties due to the scale of losses. Big guys will leave their teams, while smaller traders will become bankrupt.

La Meseta, a major Colombian exporter, was also added. It has been hit hard by default farmer farmers and is now struggling to fulfill its international supply agreements with roasters. This leaves them vulnerable to loss.

La Meseta has not responded to Reuters’s requests for comment.

The trend to sell Colombian coffee forward is growing in popularity over the years. But, until now, this move was mostly in favor of the farmers. As world coffee prices fell, farmers got better prices and received their coffee faster.

Colombia is home to approximately 550,000 coffee-growing families. The Andean nation is also the biggest producer of washed arabica, the base for benchmark futures contracts that are traded on the ICE (NYSE): exchange.