Coffee firms fail to read the tea leaves, land in hot water

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Workers sort through green robusta coffee beans for defects that cannot be removed mechanically, at a coffee processing plant in Ho Chi Minh City

Vietnam's coffee industry is going through a difficult phase, with many exporters saddled with crippling debts. Vietweek spoke with Nguyen Xuan Thai of the Vietnam Coffee and Cocoa Association, to find out what is brewing.

Vietweek: What is the reason for the dire situation?

 

Nguyen Xuan Thai: Vietnamese coffee firms have suffered losses because of their poor market analysis. Coffee prices on the world market reached US$2,220 per ton on March 13, and many firms thought that the price would continue to rise since Vietnam's 2013-14 coffee crop is forecast to yield a bad harvest. So they signed contracts with coffee importers, but asked to extend delivery. For instance, they could sign contracts in January and February, fix prices in March, and deliver in May. But they thought coffee prices would rise, so they delayed fixing prices and extended delivery until July. Importers could reduce the prices by $35-40 per ton for each extension. However, coffee prices fell relentlessly since March. On Monday robusta coffee for delivery in September was priced at $1,958 per ton. Meanwhile, firms could not continue extending delivery. Many firms faced losses since they exported coffee at low prices after earlier buying the products from farmers at higher rates.

Are the high interest rates since 2011 also a reason?

Business this year has not been affected much by bank interest rates. The current interest rate of 10-12 percent is not too high. Only in 2011 did the interest rates of 20-25 percent hurt firms' business. No firm could earn enough to pay the rates, let alone profits.

Many firms also closed down because of shortcomings in government policies. In June the Ministry of Finance asked local agencies to check firms' value-added-tax (VAT) invoice first and refund the tax later. Meanwhile, many coffee firms repaid the tax to their partners. There are firms waiting to get VAT refunds of VND40-50 billion ($1.9-2.4 million). Because of the delay in refunding VAT, many firms do not have enough funds to develop their business or repay bank loans. Many firms are likely to go bankrupt if banks ask them to repay their loans now.

Why is Vietnam unable to influence global coffee prices despite being the second biggest exporter?

Many coffee importers have representatives in Dak Lak, Vietnam's coffee biggest production area. They survey coffee crops three times per year, the first time in July-August when coffee trees bear fruits, the second in November-December when farmers are harvesting, and the last in April-May to check on inventory levels.

They have information about how the harvest is and about stocks, and they have close coordination, forcing local firms to sell them coffee at low prices. All foreign traders offer the same price to all Vietnamese firms. But there is no coordination among local coffee exporters.

Is the Vietnamese coffee industry in a crisis? How will it affect the world coffee market?

No, I don't think so. Some firms are facing huge losses and bankruptcy. However, some others are still having good business. Vietnamese exporters should review their business and strengthen cooperation among themselves to resolve the difficulties.

The current situation in the local coffee industry will not affect the world coffee market. There is still huge demand for Vietnamese coffee. In fact, we don't have enough coffee to meet importers' demand. The demand for coffee in the world market is increasing as Chinese are now consuming coffee more. Thus, the sole issue for Vietnam is the export price. Vietnamese exporters do not directly sell coffee to foreign processors but only to intermediaries, who could speculate to control the market.

The government has extended the loan repayment period for coffee firms from 12 to 36 months. Will this help firms on the verge of bankruptcy?

No, it will not. The move was aimed more at helping troubled banks by preventing coffee exporters' debts from being classified as non-performing loans. In fact, the firms have gone bankrupt. They no longer have money to do business and cannot borrow more from banks. So they cannot repay their existing loans.

How do you see Vietnam's coffee exports this year?

Vietnam will not find any difficulty in exporting due to high demand for its coffee. However, we still face a situation that we can only get good prices when the harvest is bad, and have to suffer low prices in case of a bumper harvest. The situation is so because we do not have a good storage system, and there is no coordination among coffee exporters.

This year the coffee inventory is very low, at 100,000-120,000 tons the lowest level in the past few years.

The 2013-14 output is forecast to fall by 10-15 percent due to drought, which have killed 27,000 hectares of coffee trees in Dak Lak Province, and reduced fruiting on another 16,000 hectares. 

But export prices are expected to fall because Brazil, the biggest coffee exporter, is forecast to have a bumper crop this year.

Of the 127 coffee export firms operating in Vietnam a year ago, 56 have ceased trading or shifted to other businesses after taking out loans they could not repay, according to industry reports.

The value of non-performing loans and debts likely to be unpaid stands at VND8 trillion ($379 million), or 60 percent of all coffee industry loans.

Vietnam earned $1.9 billion from coffee exports between January and July, down 22.8 percent over the same period last year, according to the General Statistics Office.

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