Brazil’s Worsening Drought Threatens Wave of Farmer Defaults (2)
Lawsuits, contract renegotiations occurring amid crop losses
Moves may cause delays, losses for buyers amid strained supply
By Fabiana Batista and Marvin G. Perez
The drought in Brazil is so severe that some farmers are reneging on their sales contracts, a sign that the turmoil seen in agricultural markets this year isn’t over.
Lawsuits and contract renegotiations are occurring between growers who have suffered massive production shortfalls and the trading firms that buy the crops and ship them around the world.
Such moves could result in delays and losses for buyers at a time when supplies are already strained and food inflation is a growing fear. That’s no small thing as Brazil’s crops are used in everything from Starbucks coffee to Coca-Cola. It’s the No. 1 shipper for sugar, soybeans and high-end arabica coffee beans. It ranks No. 2 behind the U.S. for corn.
Brazilian farmers are losing their crops to dry weather, and while that’s led to a impressive rally, sales contracts for their products were made earlier at far cheaper rates. During Brazil’s soybean harvest in February, some growers refused to honor sales agreements, and trading firms sued. With harvests for coffee and corn coming up in a matter of weeks, there are fears more of the same could be ahead, with some producers signaling they’ll break contracts.
“Our major concern is that there will be a rush of farmers who don’t want to fulfill contracts due to price differences,” said Andre Nassar, head of Abiove, a group representing major trading houses in Brazil, speaking of corn contracts. “We’ll only know after the harvest starts, in two weeks.”
Corn farmers who know they’ve sold more than they’ll harvest are trying to alter or cancel contracts, said Tarso Veloso, an analyst at Chicago-based AgResource. But for now, these are isolated incidents.
To be sure, even the soybean cancellations earlier this year represented an “insignificant” volume, said Wellington Andrade, executive director for farm group Aprosoja in Mato Grosso. Most farmers are complying with contracts, he said. Andrade doesn’t expect corn contract cancellations to materialize.
Law firm Santos Neto has sued more than 40 soybean farmers this year and is now preparing for more lawsuits against corn and coffee farmers. The price of high-end coffee beans known as arabica have surged 50% in the past year amid crop losses while corn futures more than doubled.
“Some farmers are about to harvest corn, but haven’t set up a date for delivery, signaling they’ll default,” said Fernando Billoti, a partner at the firm. “We’re seeing similar concerning reports on coffee trades.”
Trading houses are planning to set up a register of farmers who don’t comply with corn contracts, which will prevent them from reselling their crops to competing firms, Abiove’s Nassar said. Currently, spot prices for the corn crop about to be harvested are far higher than what was agreed upon in contracts, he said. Such sales account for as much as 64% of the crop. When farmers default on contracts, traders turn to spot markets to meet their obligations.
Chicken and pork companies are also major buyer of forward contracts of crops to feed animals, and could see similar troubles. Crop losses will likely be much bigger than forecast, and that spike in costs hasn’t been priced into their stocks, according to an executive who heads the agribusiness portfolio at a major bank operating in Brazil, who’s not allowed to speak to the press and asked not to be named.
But the problem could get worse if crops keep shrinking, and the drought shows no sign of relenting. Brazil’s government issued unprecedented water emergency warnings for five states, including top coffee grower Minas Gerais and Sao Paulo, the biggest cane grower.
Workers harvest coffee on a farm in Machado, Minas Gerais state, Brazil, on Tuesday, May 28, 2019. As coffee prices globally trade near the lowest in 13 years, Brazil’s coffee boom is posing huge challenges for coffee farmers in various corners of the world.
For coffee, defaults pose a bigger risk than usual because Brazilian farmers have sold so much more ahead of time compared with the past.
In a rare move, one of the world’s biggest coffee trading firms is making in-person visits to at-risk farms before contracts expire in August to try and minimize defaults, according the head of the company, who’s not allowed to speak publicly and asked not to be named. Defaults will likely occur, though only for less than 1% of contracts, the executive said.
The last time Brazil saw widespread defaults on coffee contracts was more than a decade ago, and as a result, trading firms restricted forward sales in some regions for about five years.
Traders are currently in negotiations with coffee farmers who’ve suffered crop losses to postpone part of the deliveries, said Carlos Alberto Fernandes Santana, a director at Empresa Interagricola SA, a unit of trader Ecom Agroindustrial Corp. Instead of fulfilling contracts as usual, farmers could deliver 60% to 70% of the volume this year and the rest later.
While conditions are ripe for defaults, coffee buyers are hopeful it won’t be widespread. Only a few small producers so far have defaulted on minor sales, according to Daniel Wolthers, a broker in Sao Paulo. Canceling a contract would boost short-term revenue for producers, but “it impacts credibility for many crops to come,” trading firm Comexim said in a report. Ecom also expects no systemic issues, Santana said.
Meanwhile, some farmers in second-ranked arabica shipper Colombia have canceled contracts that were inked at lower prices, said Roberto Velez, chief executive officer for the Colombian Federation of Coffee Growers.
These were “commitments to cooperatives but also for independent buyers and private exporters,” Velez said
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