The coffee business market is not as simple as “you need what I have, and money for goods exchanged.”
If it were that simple, we wouldn’t have witnessed bankruptcies or people fleeing due to “weather in Brazil,” “rising US dollars,” or hundreds of other reasons causing dozens of agents to flee, taking with them the entire year’s labor of farmers.
Let’s continue following Part 3 of the series by Kinh Vu, which discusses factors influencing the coffee market, and learn about the hidden aspects that haven’t been talked about before.
Part 3: Information and Impact
Winter in Brazil usually occurs between June 21 and August 25 each year, marking the coldest period of the year. Coffee prices often inversely correlate with the temperature during this time. Just one report stating that temperatures in coffee-growing regions have fallen below 0°C or that a cold snap is forecasted for the coming days typically causes prices to rise the following day, or at least to not drop further.
We should not expect absolute accuracy from these reports. Whether frost occurs or not isn’t as important; what matters is that traders often use this opportunity to buy or sell, and farmers should also take advantage of this fact to sell their harvest.
In reality, a temperature near 0°C is just a necessary condition, not a sufficient one, for frost to form in Brazil. Another condition, which is rarely mentioned in reports, is the movement of high-pressure systems from the southern part of Brazil upwards. This high-pressure system must reach over 1030mb to have the potential to cause frost. Statistics show that high-pressure systems moving from the east have little chance of causing frost. Similarly, high-pressure systems before June 21 or after August 25 are unlikely to cause frost.
From this perspective, the likelihood of frost damaging crops, like in 1994, is not as high, so betting on weather conditions requires careful consideration and accurate information.
Sometimes, like in life, we must find wise mentors and good friends. Similarly, when looking up information online, we must cross-reference and critically assess what we read. This is particularly important in business, when deciding the best time to sell a year’s worth of hard-earned crops.
Therefore, sharing knowledge and learning from each other’s failures or successes in the community is necessary to quickly gather experience. Don’t be too quick to reject the long-standing rules simply because they seem harsh to you. The price charts of coffee fluctuate as they always have, influenced by a mix of true and false information. If we are involved, let’s seize the opportunity to learn more instead of expecting the market to be empathetic or blaming it for the presence of false elements.
Differential (Trừ Lùi)
When discussing differential, we first need to define the price we see traded daily in the market. The price is for delivery at the port of arrival. Theoretically, when buying coffee, people often say: “The coffee price for September delivery at port A closed yesterday at $1730.” So, if the buyer requests delivery at the seller’s port (typically called FOB Ho Chi Minh, FOB Hai Phong…), they must deduct an amount for shipping, insurance, etc.
Over time, this differential has evolved. It’s no longer just about transportation costs but also factors like the quality and reputation of coffee brands from different countries. For example, when we say that the price of coffee in London for September was $1730/ton, this is shorthand, as it also refers to the quality of the coffee. In the coffee trading world, this typically means R2 coffee with 1% impurities, 5% broken beans, 13% moisture, and 90% above screen size 13 (5mm). This coffee has a quality that can be processed.
At the same time, coffee from other countries with higher standards than the one mentioned will naturally have a lower differential.
Currently, our export quality has improved significantly due to more advanced processing equipment. Our processors have met much higher quality standards, so not only do we avoid negative differentials, but we may even say “London Plus,” meaning the price is higher than London’s.
Gone are the days when foreign traders would demand coffee with 8% broken beans in a good year to get a higher discount or demand 5% broken beans when it rained a lot. Such tactics are no longer in practice.
Now, let’s go back to differential trading. For example, if in July, I agree to sell 10 tons of coffee based on the London market price for September, with a $100 discount, it means that until the First Notice Day for September delivery (around October 2), any day I find favorable, I can call to lock in the price, even right after signing the contract.
Thus, the essence of differential trading isn’t wrong or risky. However, the real risk comes from the fact that we’ve never controlled the level of differential, which is determined by the buyer. Traders in Europe or America often set a standard differential for a particular buying time, whereas, strangely, we, as Vietnamese traders, don’t have the same control.
When we sell on differential terms, we let buyers track the total amount we’ve sold and will deliver, without locking in the price. This puts us at the mercy of market fluctuations. In contrast, with fixed-price sales, we control our fate. Buyers, knowing how much coffee they will receive at a certain time, may not raise the price unless a natural disaster strikes Brazil’s coffee-growing regions. But we don’t have reliable statistics to determine how much coffee has been sold domestically at differential prices, making it difficult to guide future sales.
This delay in the buyer’s decision, knowing how much is left to purchase, causes problems in executing the price order. Buyers may hesitate or lower the price to match the market, causing coffee prices to fluctuate unpredictably.
Many may ask why Vietnamese coffee traders sell on differential terms. As mentioned earlier, differential trading isn’t inherently wrong if macroeconomic management has a better tool to help traders align on strategy. However, the issue isn’t just about that—it’s about the financial health of Vietnamese coffee export companies, which foreign speculators understand very well. We’ve seen numerous times that domestic coffee prices exceed global prices. In such situations, selling immediately locks in losses, while differential selling forces traders to hope for price increases, even though they have no financial control to sell or hold back based on the market.
Stop Loss
Every coffee trader knows the term “Stop Loss,” so I won’t go into unnecessary explanations. However, on the farmers’ forum, not everyone may be familiar with it, so I’ll briefly explain.
When a trader sells at a London price, either with a discount or premium, but has not locked in the price yet (only agreed on the price differential), the contract will be executed at the closing price on the day of delivery. The trader will receive 70% of the transaction’s value as an advance.
For example:
You sell at a London price of $1730, with a $100 differential, and the price on the day of delivery is $1730. After deducting the $100 differential, you’ll get $1630/ton. This will be used to calculate the 70% advance, i.e., $1630 x 70% = $1141/ton.
At this point, you’ve essentially loaned the buyer 30% of the transaction’s value interest-free. However, this may distract from the main point.
Later, you wait for the “good day” to lock in the price, but due to the factors mentioned, prices drop. Some traders will lower their price to settle the contract, while others will hold out, hoping for a better price. But when the price hits $1141/ton, the contract will automatically close to “protect the seller’s interests,” and the price will be locked. This is known as “Stop Loss.” This has happened many times before, and it will likely continue.
Imagine a buyer holding several tens of thousands of lots. When the market is between $1400-1300/ton, they might sell a few lots at $1241/ton, triggering the “Stop Loss” for others. Many have bitterly watched as their contracts lost 30% of their value, with no chance of recovery.
Please don’t think this only affects traders; it impacts farmers too. They are often the victims, even though they aren’t directly involved in the market’s high-flying decisions.