Over the past month, before coffee exporters in Vietnam rushed to sign export contracts for the new coffee crop, the Ministry of Agriculture and Rural Development and the Vietnam Coffee-Cocoa Association (Vicofa) have repeatedly advised coffee exporters not to sign contracts using the “price to be fixed” method, in order to avoid risks that have been encountered in recent years, especially in the 2011/12 coffee season.
We would like to introduce the opinions of coffee expert Nguyễn Quang Bình to help readers better understand the risks associated with both coffee export methods: “price locked in” and “price to be fixed.”
One of the risk mitigation measures often mentioned is the Ministry of Agriculture and Rural Development’s recommendation not to sign “discounted” contracts and only sell contracts with “immediate payment” once goods are in hand.
In coffee export, both on the international market and in Vietnam, buyers and sellers routinely use a type of contract called “discounted.” In reality, this contract exists alongside another with a clear purchase price, where the two parties agree on a specific unit price for the contract.
A contract with a specific unit price, when signed, is often called a “spot contract” or “outright” in English. This is a future contract based on the price difference with Robusta futures on the Liffe exchange, but the price is set immediately, making it a “locked-in price” or “settled price” contract.
On the other hand, the “discounted or added price” contract involves an agreement between the buyer and seller to negotiate a discount or addition (differential) based on the standard price of Robusta coffee traded on the Liffe exchange. This allows both parties to decide the price at a time when they feel it is safe for their respective positions.
Therefore, with this method, both parties have the opportunity to minimize the risk when the price moves contrary to their expectations. These transactions are called “price to be fixed” contracts.
In professional coffee trading, sellers often prefer the “locked-in price” method when prices are expected to drop (bear markets), while the “price to be fixed” contract is more favorable in a market with rising prices (bull markets). Occasionally, traders can predict whether prices will rise or fall based on the number of contracts. If many “locked-in price” contracts are sold, the market will expect a price decrease, and if many “price to be fixed” contracts are sold, the market anticipates price increases.
Thus, the recommendation to avoid “discounted” contracts or “price to be fixed” contracts from the Ministry of Agriculture and Rural Development and Vicofa can be understood as follows: the market is expected to decline in this season (a scenario that no one desires).
However, remember that in the previous season (2011/12), Vicofa also advised against “discounted” sales, but many banks did not approve of lending for “locked-in price” contracts because the prices had already been sold too low, causing exporters to suffer losses and be unable to collect debts. As a result, many exporters had to back out of contracts, causing a significant loss of credibility in the coffee industry.
Many companies, following Vicofa’s advice, sold at “locked-in price” levels of $1,900-$1,950/ton because they thought that price was fair. However, immediately after, prices surged from the beginning to the end of the season, pushing domestic prices up, and sellers were unable to collect coffee to fulfill their contracts, leading to losses and unfulfilled contracts.
Thus, the advice to “avoid discounted sales” caused significant harm and led to substantial losses for those who followed it.
To demonstrate, imagine today an exporter selling at a “locked-in price” of $1,750/ton (i.e., a $56 discount compared to the Liffe price in January 2012) for delivery in December 2011, thinking the price would drop further. However, a week later, for some reason, coffee futures prices rise to $2,000/ton, pulling domestic prices up accordingly.
In this case, the exporter must deliver at $1,750/ton (sometimes buying coffee from farmers at $1,950/ton) instead of “locking in” a higher price to reduce losses.
Clearly, the drop in prices currently is not because too many “price to be fixed” contracts were signed.
In a market heavily influenced by financial speculation, the decision to sell using a “locked-in price” or “price to be fixed” contract should be left to each business. They know what proportion they should sell under each method to avoid price risks.
In conclusion, even though Vietnam is a major exporter of Robusta coffee, its businesses still lack the ability to control prices to effectively help farmers continue production and maintain Vietnam’s position as the world’s number one Robusta coffee exporter.