International coffee traders are on tenterhooks after Brazil-based traders Atlantica and Cafebras sought to negotiate with creditors in court, having been hit by a surge in global arabica prices.
Arabica coffee futures KCc2 on the ICE exchange, used to price beans around the world, are at their highest in nearly half a century on worries the upcoming crop in top producer Brazil has been damaged by this year's drought.
Some farmers have as a result delayed deliveries in hope of securing even higher prices, while it has become very expensive for traders to hold short futures positions as a hedge against physical purchases.
This is thanks to a surge in margin calls or downpayments that traders are required to pay to protect against any trading losses.
Debt Restructuring
Atlantica and Cafebras on Wednesday said in a statement they were seeking to restructure their debt, citing issues caused by poor crops and a high volume of rollovers and defaults.
Traders believe they will not be the last to face these problems and that this will drive coffee prices even higher and eventually filter through to consumers.
"We're getting calls from everyone saying 'do you have the coffee you owe me?'," said one trader from a major coffee trade house. "We think they owe the industry and the trade around half a million bags," he said, referring to Atlantica and Cafebras.
He added traders who hedged their coffee bean purchases from Atlantica and Cafebras might take the view they may not receive their coffee and should close out what has become a loss-making short position by buying or going long in the futures market.
There is evidence this has already been happening, with ICE arabica futures trading up some 40% so far this month at more than $3 per lb. Traders say there is still more to go on the upside.
"I wonder who else is having issues," said the head of coffee research at another global coffee trade house.
Atlantica and Cafebras said they are owed some 900,000 bags of coffee from farmers who have yet to make good on their delivery pledges.
"This kind of situation feeds off itself and cascades across the market. In my view we're going to go to $3.50 per lb or very close to it, and soon," said the trader.
