Speculators squeezing world coffee market, say Vietnam’s exporters

July 2, 2009

VietNamNet Bridge – It’s said that Vietnamese exporters have fallen into the trap because of their lack of professionalism and unity.

Vicofa Chairman Luong Van Tu

Vietnam is the No2 coffee exporter after Brazil, and produces about 15 percent of the world crop.   On July 2, an extraordinary meeting of the Vietnam Coffee and Cocoa Association (Vicofa) will address abnormal conditions in the world coffee market.  On the eve of the meeting, Vicofa Chairman Luong Van Tu told VnEconomy that speculators have been fooling Vietnamese exporters.

 

What’s happening now in the world coffee market?

 

It’s abnormal; coffee prices have fallen dramatically and unprecedentedly.

 

On the London trading floor, the benchmark coffee price fell by nearly $240 per tonne in just two weeks, from $1530 for September delivery to $1313.  Vietnam’s coffee export price fell to a three year low of $1195 per tonne FOB on June 26.

 

Have prices fallen because of oversupply?

 

I can say for sure that the coffee price has been decreasing because of speculators squeezing  the market. The price decrease should not be blamed on the laws of supply and demand.   Speculators have been deliberately distorting market forces to make profit.

 

All during May , they spread news that coffee prices would increase sharply, prompting Vietnamese enterprises to hoard coffee for export. A lot of enterprises borrowed money from banks to collect coffee from farmers and stock it. Now they have to sell that coffee at depressed prices so they can pay back the money they borrowed.

 

Then in June, the speculators stopped purchasing coffee to push prices down.  They started rumours that the coffee price would drop further towards the year end. Vietnamese enterprises which had hoarded coffee panicked and rushed to sell out.

 

As the result, many Vietnamese companies are incurring losses of 3 to 4 million dong (over $200) per tonne of coffee. A lot of enterprises have reported total losses of 100 to 500 million dong.

 

How can foreign speculators corner the market when Vietnam is the world’s second biggest coffee producer?

 

In fact, our association, Vicofa, has often warned members about the risks of ‘playing the market.’ This same thing occurred in October 2008, and is remembered as ‘black October’. However, enterprises have not learned their lesson.

 

The are two big coffee trading floors in the world, in London and New York. No Vietnamese enterprise has sold coffee on the New York exchange, while only a few enterprises have sold directly in London. Typically foreign enterprises (twelve of them are present here in Vietnam) purchase Vietnam’s coffee and then sell on the London exchange to make profit. Vietnam’s coffee export price is typically the sale price in London minus $120.

 

Vietnamese enterprises do not associate with or cooperate with each other. Each tracks information about the world market, but they do not know to filter it. This is the weak point that has enabled foreign speculators to play them for fools. The speculators have continuously been spreading forecasts to influence the market and catch Vietnamese enterprises in a trap.

 

While many companies have suffered because they hoarded too much coffee, others have suffered because they have made export contracts without having the coffee in hand.  The latter are obligated to deliver exports in September, but, as the coffee price has dropped so dramatically, most of farmers have stopped selling.

 

Vietnam expects to produce about one million tonnes of coffee beans in total this year.  Already 680,000 tonnes have been delivered. Vietnamese exporters rushed to export this crop earlier and accepted low export prices, and they now are caught short — the remaining volume of contracted exports far exceeds the 300,000 tonnes of coffee left.

 

Many enterprises have had to delay deliveries from July to September, bearing a penalty of $35 per tonne, or to November – a penalty of $50 per tonne.

 

What’s the solution to this problem, then?

 

Optimally, Vietnamese exporters should stop signing export contracts. However, it seems that’s not feasible, because Vietnamese enterprises have never been united.

 

Therefore, Vicofa has made four recommendations.  First, exporters should learn carefully about the buyers, and should not sell products to speculators who may force prices down. Second, they should not sign contracts for forward delivery while they don’t have the coffee in hand. Third, enterprises should inform each other about export prices. Fourth, enterprises that have fallen into difficulties need to take timely and wise steps to cut their losses.

 

Previously, a government agency purchased and held coffee to help stabilize the market.  VIcofa is proposing the State to resume this activity to help enterprises avoid risks.

 

VietNamNet/TBKTVN

 

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