Brazilian Coffee Traders Put Up $7 Billion In Margin Calls – CoffeeTalk

Brazil’s Minas Gerais, the largest coffee-growing state in the world’s No. 1 bean producer, has seen a sharp run-up in coffee prices, leaving some producers scrambling to find sufficient cash to back their hedges on the New York exchange. Atlântica Exportação e Importação SA, which accounts for 8% of Brazil’s arabica sales, has asked a local court for more time to negotiate with creditors to avoid filing for bankruptcy. Sister company Cafebras Comércio de Cafés do Brasil SA is seeking the same 60-day grace period. Industry watchers say they won’t be the last to face serious problems.

Futures prices for arabica beans have been on a rampage, jumping around 70% between January and late November to the highest in more than four decades. Brokers require coffee producers and exporters to put up more cash in the form of margin deposits to cover possible losses. Some traders that sold futures are forced to buy them back to step away from the market, sending prices even higher in a vicious cycle.

Arabica prices were essentially flat on Tuesday after earlier rising as much as 1.6% in New York. At Montesanto Tavares Group Participações SA, the cost to maintain hedges jumped to a staggering 158% of accounts receivable in November from 74% in May. The surging coffee prices are pushing the market toward a breaking point, echoing the recent troubles in other key commodities. High margin rates are a huge stress on the financial side, and for trade firms with contracts on both coffee and cocoa, it’s a double whammy.

In addition to the financial stress, the coffee market is reeling from high logistics costs and inefficiencies. Coffee sellers spent an extra 7 million reais ($1.2 million) this year on things like additional storage space and other port fees. Shipping costs between coffee-producing countries in Asia and consumer markets in Europe are also rising amid the crisis in the Red Sea. Additionally, concerns are mounting that the next arabica coffee harvest will be smaller due to a severe drought.

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