Coffee prices rise, more businesses go bankrupt: exec

Robusta coffee prices are continuing to rise sharply, exceeding Arabica for the first time in over 50 years, and while coffee growers are content, many coffee traders are struggling, writes Phan Minh Thong, general director of Phuc Sinh Group, a leading coffee exporter in Vietnam.

35-60% of small roasters may go bankrupt

Coffee prices skyrocketed in the first half of the year, rising from VND58 million ($2,278) to VND136 million ($5,343) per ton. Farmers and businesses with unsold commodities stand to greatly benefit from the high prices. The remaining players, including buyers, enterprises that have not yet received goods, and factories that have sold Vietnamese coffee, are now required to purchase raw materials for production and export, all face extraordinary challenges.

For many years, coffee has remained constant in a price range of $1,200 to $1,500 per ton. However, coffee prices can plummet as low as $400 per ton and as high as $2,600 per ton.

Farmers were almost assured of earning more than $1,800 per ton. With such consistent pricing, powdered coffee and instant coffee roasters have made significant profits over the last 20 years.

However, the situation has changed since prices have fluctuated significantly. Coffee prices have risen from $1,500 to $5,000 per ton, meaning raw materials have gone up by 250% to 350%, excluding extra expenses. So, how will coffee processing and roasting firms around the world survive without going bankrupt?

In fact, the sharp increase in Vietnamese robusta prices has caused Brazilian robusta conilon prices to also increase sharply. Currently, Vietnamese robusta beans are priced at $5,600 per ton, and robusta conilon has also reached $4,600-4,700 per ton.

Meanwhile, Arabica has also increased sharply, from $3,500-5,200 per ton. The consequence of this series of continuous price increases is that buyers around the world are having to spend more money to drink coffee. Specifically in the U.S., a normal cup of coffee used to cost $7-8, but now, with the increase in raw material prices, it has gone up to about $15-20.

Normally, the higher the price, the happier the seller. However, this "crazy" price increase has the potential to bankrupt 35% of small- and medium-sized roasters globally. And if the price storm does not pass, the bankruptcy rate will most likely rise to 60%.

A customer who went bankrupt and lost most of their money told us that out of the 45 buyers who purchased their products, 42 had gone bankrupt or were nearly bankrupt, and they no longer trust anyone.

Fierce times for coffee

There are also many other stories. For example, trading relationships in the coffee industry have traditionally been quite stable and rely heavily on traditional experience. Only when something goes wrong do people have to use contracts. Many times, the seller and buyer both think they are right, but when they read the contract carefully, they realize they are wrong.

I'm discussing coffee, but I want to relate a comparable anecdote concerning the pepper raw material purchase contracts. In February 2012, we purchased pepper from an Indonesian supplier and delivered it to Hong Kong customers. The contract's terms were free on board (FOB), and both parties signed routinely. It was January 2012. However, the Hong Kong customer experienced some issues and requested that the goods be delivered later than intended. Because of this, we gave shipping instructions to Indonesian vendors one day later.

At the time, pepper prices skyrocketed. On January 31, 2012, the partner issued a contract cancellation form, which astonished us. However, the vendor did not go into detail, saying only that we had included an arbitration clause in the contract with the International General Produce Association (IGPA) London, so if you have any problems, please contact the arbitration center. This facility requested that we pay more than 2,000 pounds ($2,518) for arbitration. With the expectation that we would win, we paid immediately. However, the surprising thing was that a week later, the results came back that we had lost. The arbitration center clearly stated that our failure to comply with the contract was due to our failure to send the required delivery instructions before January 31, 2012.

Misunderstanding costs dearly

The next narrative is that while procuring coffee has become increasingly difficult, Phuc Sinh continues to strive for on-time delivery. We have almost finished thousands of tons of contracts. However, after listening to a report, I discovered that a Dutch firm still had a lot of products worth millions of dollars. I checked and discovered that they held money on numerous contracts. They explain that they retained the money to force us to deliver coffee. I carefully studied the contract and saw a condition stating that money would be due three days after obtaining the documents. However, for many contracts, there was a 30-day payment clause, but they still had not been paid. Thus, the buyer violated the contract terms.

The fact that buyers hold on to their money has significant ramifications. When purchasing raw coffee from Vietnamese vendors or farmers, if payment is not received immediately, they will not sell. In 2023/2024, coffee prices climbed dramatically within a week, with a difference of VND20 million ($785) per ton, rendering the damage inflicted by the delays irreversible.

The most serious consequence is that the confidence between sellers and purchasers has been destroyed. When prices varied so dramatically, we still supplied our goods and provided all of the documentation, but they still retained their money and the goods, and placed pressure on us to deliver again, not once but nearly 10 times. Can I trust them?

If you do something wrong once and no one reminds you, and the vendor does not tell you you're wrong every time, the wrong thing becomes right. If the buyer is worried about the buyer making a mistake and makes one themselves, it is their fault. Holding back funds from exporters out of concern that they may not deliver is fundamentally incorrect.

Currently, robusta coffee prices are fluctuating, and no one expected them to surpass Arabica. This is the first time in 52 years that such an event has occurred. Coffee growers prosper, but instant coffee makers confront tremendous challenges. Many firms will be forced to downsize or perhaps go bankrupt, and consumers will have to pay exorbitant prices for a cup of pure coffee.

To adapt, the domestic coffee sector will need to undertake significant changes. Buying and selling partners must persevere and work together patiently to find a solution. To get good results and preserve a long-term partnership, each side must occasionally suffer a minor loss, but if it is due to a momentary profit, I am afraid it will be extremely difficult to develop sustainably.