Farmers spread coffee beans to dry at a farm in the Central Highlands. Photo: Dao Ngoc Thach
The folly of using short-term loans for long-term projects and a general policy of trading in paper stocks are coming home to roost for coffee producers and exporters in Vietnam.
They have piled up huge amounts of debt and will have to be very careful about their next steps if they are not to make a bad situation worse, industry insiders say.
In a sign of the troubles to come, the Hanoi Stock Exchange delisted Thai Hoa Corporation on July 4.
The exchange said that its decision was prompted by the fact that the company's losses have climbed steadily to more than US$29.3 million, around 30 times its 2012 revenues and around 8 percent higher than its registered capital.
Thai Hoa, together with other former major foreign exchange earners like the Vietnam National Coffee Corporation (Vinacafe) in Ho Chi Minh City and Vinacafe Buon Ma Thuot in the Central Highlands, have been mentioned in many recent media reports as the biggest losers who have dragged the coffee industry down.
The total bad debt loans more than 12 months overdue owed by the industry is estimated at VND6.3 trillion ($300 million) in banking and coffee industry reports released earlier this month.
Vietnam has risen from a freshman in the 1980s to become the world's second-largest coffee producer after Brazil. Coffee is its biggest export earner among agricultural products, and it is the biggest producer and exporter of robusta beans, which are mainly used to make instant coffee.
The country exported 1.19 million tons of coffee from the latest crop between September 2012 and last month, earning $1.72 billion, compared to revenues of more than $3.5 billion between 2011 and 2012.
While major companies in other sectors have suffered losses because they invested in non-core businesses, the coffee giants have failed with investments in their own business coffee cultivation and processing.
Vinacafe is trying to sell its headquarters building and other assets to reduce debts of nearly VND1 billion ($45 million) it owes the French Development Agency and Vietnam Bank for Agriculture and Rural Development.
A Thoi Bao Kinh Te Saigon report said the company received French funding of 212 million francs ($42.2 million) in 1999, based on a government guarantee, to establish 40,000 hectares of arabica coffee plantations in northern Vietnam.
It announced in 2005 that the project was a total failure, without giving details. The debt is now three years overdue.
Meanwhile, Thai Hoa's loans and debts reached more than $32.5 million as of the end of last year.
The company had been a top exporter until several years ago. It exported $125 million worth of coffee in the 2009-2010 period.
Vinacafe Buon Ma Thuot or Tay Nguyen Coffee Investment and Import-Export JSC, the country's biggest coffee exporter in the Central Highlands, is owing banks more than $75.3 million.
The companies have admitted their fault in using short-term loans for long-term projects, but they have also blamed high interest rates - at an average of 17 percent a year, sometimes 24 percent - and a strong dollar.
However, experts and authorities say the bigger problem here is that companies are investing in risky futures despite their inexperience and poor forecasting abilities.
The government on July 8 said it would allow banks to triple the loan terms for coffee export companies to 36 months, giving them more time to repay. The move came after domestic coffee prices fell by 17 percent from a 22-month high reached in mid-March.
While complying with the decision, the Ministry and Finance said in a statement that extending the loan terms is not the ultimate solution.
It said coffee exporters are already among the supported businesses, with zero export tariffs (compared to import duties of between 15 and 30 percent), and that the loan term of one year applied so far was not really short.
"The problem is they have not been active in making forecasts"¦ They kept hoarding coffee waiting for the prices to rise."
The ministry said the way enterprises have done business has led to a shortage of capital in the industry and high stockpiles, affecting many farmers who had been persuaded to leave their beans with the companies waiting for higher prices.
Unsold beans from the current crop may be 220,000 tons, or 22 percent more than the 180,000 tons a year earlier, according to a Bloomberg report last week. Vietnam's coffee shipments fell 37 percent on the year to 88,387 tons in June, according to customs data.
Early this year, many companies had agreed to export deals for June and July even without coffee beans in store, hoping they would be able to buy them at low prices and sell them at high profits. Instead they had to accept losses when prices plunged.
The industry and trade department of Dak Lak, where Vinacafe Buon Ma Thuot is based, said 43 coffee companies and retailers have gone bankrupt with more than VND300 billion in unpaid debt, apart from owing farmers money for 3,000 tons of coffee, according to a Thoi Bao Kinh Te Saigon report published July 11.
Nguyen Viet Vinh, general secretary of the Vietnam Coffee and Cocoa Association, said many coffee companies in Vietnam do not have a department for making market analysis and forecasts, "rendering them incapable of dealing with fluctuations resulting from the manipulations of speculators in international exchanges."
The lack of expertise has caused the companies to make "poor" business decisions, like building large storehouses and processing plants that have been left unused.
Doan Trieu Nhan, former chairman of the association, referred to Thai Hoa's case as "not a surprising one."
Nhan said the company did not make sure its many processing plants would have raw material to work on.
The company invested in two plants with a capacity of 110,000 tons a year in the central province of Quang Tri, which only had 5,000 hectares of coffee plantations with a maximum output of 10,000 tons.
Its director Nguyen Van An admitted that the abundance of processing plants in the province was "unexpected."
He said before Thai Hoa's investments in Quang Tri, the province only had three coffee processing plants, but after giving it the license for two plants, local authorities also approved 11 others.
The supply of raw material in the province and its neighbors can only meet around 40 percent of the plants' capacity.
He said companies have offered farmers high prices but their plants were still idle. "So it's not just mine, but many companies having plants here have suffered losses."
Thai Hoa in 2009 also invested in a $5 million coffee processing plant in Son La with capacity of 30,000 tons a year, while the supply from the northern province and its neighboring Dien Bien Province combined only reaches around 10,000 tons.
An said he had estimated a bigger supply before building the plant, but it turned out that local farmers are used to processing the beans themselves, and the plants could only receive supplies from big plantations.
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