To contribute an answer to the question raised during the “price squeeze” phenomenon in the Robusta coffee market, author Kinh Vu has written an article sharing his perspective. The editorial board of Y5Cafe invites readers to refer to it.
Along with the excitement of rising coffee prices after a prolonged period of stagnation, today I would like to share my thoughts on the issue of the price of near-term coffee contracts being higher, while long-term contracts are lower.
Unlike the feedback of most farmers who sent responses to the article “Coffee Futures Prices Are Being Squeezed,” reprinted on Y5Cafe by author Nguyễn Quang Bình from Kinh Tế Saigon Online, I was very impressed by this article from the author.
In my view, this is an article by someone who has profound knowledge of the correlation between coffee buying and selling forces in the international market. To gain such analytical experience, the writer must have gone through years of practice in the industry. The data sourcing and research have been carried out very carefully and responsibly, not just superficially. I regret that we should have investigated this more deeply for our own benefit, in order to have a correct approach about what farmers can or should do in response to the price squeeze. Instead, some responses have offered very speculative opinions and always assumed that anyone who is not a farmer is the enemy.
This is a self-defeating mentality when denying all valuable information we need to grasp. This will prevent us from drawing any useful direction for ourselves.
To save time, let me go straight to the point:
According to the report from the General Department of Customs, as cited by Bloomberg.com, in January 2012, Vietnam only exported 112,182 tons of coffee, a decrease of nearly 50% (48%) compared to the same period last year. The reason for this decrease in exports is multifaceted, but the most certain one is that farmers have kept their stock and not sold when prices were low (the reason why farmers were able to do this will be left for the readers to comment on).
In a report, Lysu Paez, an analyst at Natixis SA in Paris, said, “Farmers have kept 60% of their harvest, and this has supported Robusta coffee prices.”
Unsurprisingly, as a result of this “we’ll all hold on to our stocks together” mentality, the stockpiled coffee on the NYSE Liffe market has dropped to 227,170 tons as of January 26, 2012, down 46% from 417,420 tons on July 11, 2011.
It seems that the roasters did not anticipate the resolute spirit of the farmers “We’d rather die than sell.” Especially when farmers succeeded in holding back 60% of their coffee, the plans to buy cheap coffee during the pre-and post-Tet period, targeting after harvest from the poor Vietnamese farmers who like to live lavishly, failed.
However, coffee traders worldwide are different. With their cool, calculative heads, over the past period, we have seen that they did not rush to compete with the high domestic prices (when international prices were falling). They have continued to buy steadily, storing the coffee in bonded warehouses, with some blending it with coffee already certified by the NYSE Liffe and waiting. They always balance the inventory in warehouses in the producing countries, keeping the inventory in the NYSE Liffe market lower than the same period last year to intimidate roasters: “You want to buy coffee for immediate delivery? Sure, we’ll meet your demand, but the price will be $60/t higher than next month, as the coffee you want cannot be sourced from the farmers holding back their stock.”
We must understand that the first notice day of futures contracts for months 1, 3, 5, 7, 11 falls on the last day of the previous even month. At this time (February 13, 2012), we cannot deliver the coffee for the March contract at Liffe. Only those holding inventory at the Liffe warehouses can do that. Clearly, Vietnamese companies and farmers are not part of that list.
With this situation, I believe this will continue after March expires and moves into May 2012. There will still be a significant price difference between May and July contracts when Liffe inventory remains low and farmers continue to sell about 100,000 tons per month.
Previously, there were opinions that the articles on Y5Cafe urging farmers to hold on to their stocks were “ignorant, speculative,” and that one day they would be forced to sell in a rush. We have received many such comments and posted almost all of them, except for those that were excessively rude and impolite.
Today, through this article, I would like to reaffirm that Y5Cafe does not intend to make such a claim. We simply present our thoughts and believe that “managing the amount of stock released into the market is very important.” Managing stock does not mean hoarding, as we clearly produce products to sell. Producers always have the right to wish to sell their products at a price that can sustain their families and reinvest in production. With an annual export volume of about 1.2 million tons, distributed over 12 months, the average export per month is around 100,000 tons, which is quite reasonable. If I were a businessman with enough capital to buy 50 tons per day, why would I reduce the price if you keep selling me three times that amount? I would lower the price to buy more, regardless of what happens tomorrow.
In my personal opinion, farmers should not choose to sell at the beginning of each odd month but should wait until the second half of even months when prices are still relatively tight.
I do not expect coffee prices to go up drastically, but at the current price of around 39,000 VND per kg, it is only roughly equivalent to the 32,000 VND price of last year, and this price still leaves farmers in significant hardship. Therefore, selling just enough to meet expenses remains a necessary action under the current circumstances.