SAO PAULO/NEW YORK, July 22 (Reuters) - Frost that struck Brazil's coffee belt this week has sparked fears of farmers defaulting on deliveries of recently-harvested coffee that were sold to commodities traders months ago at prices that now are half the current values.
An unusual cold snap https://www.reuters.com/world/americas/freak-brazil-frost-hits-heart-coffee-belt-damaging-crops-2021-07-21, with temperatures dropping to freezing levels in a matter of minutes on the morning of July 20, delivered a blow to the heart of Brazil's coffee belt, damaging trees and harming prospects for next year's crop.
Farmers may think twice about meeting their contract obligations for the current crop, said traders and analysts, as ICE futures for arabica have sky-rocketed.
"These farmers sold coffee for as low as 500 reais ($96.20)(per 60-kg bag)," said Judy Ganes, a U.S.-based soft commodities analyst, adding that the worst drought in 90 years had already cut Brazilian coffee production.
Some farmers have sought to renegotiate prices with traders before the frost.
"The market was talking about defaults when prices were 40 cents below," said a European coffee trader who added the latest pricing "made the risk 10 times more likely."
Arabica coffee prices rose 10% on Thursday to $1.95 per pound, the highest in six-and-a-half years.
A broker who works with large international traders sourcing coffee in Minas Gerais, Brazil's largest producing state, said the physical market is frozen.
But, he added: "so far, we have not received any formal word from farmers saying they will not deliver."
Airton Gonçalves, who has nearly 400,000 coffee trees in Patrocinio, Minas Gerais, state said he delivered 1,500 bags to European trader Sucafina this week, a day before the July 20 frost. He had agreed months ago to sell that coffee on average for 640 reais per bag.
Brokers heard of offers in Minas Gerais on Thursday for 1,050 reais per bag, with no sellers.
SIZE OF LOSSES, SLOW RECOVERY
Estimates on Thursday varied on possible losses to next year's crop as the market digests the damage. Initial forecasts of a loss of 1-2 million bags quickly increased. Brazilian exporter Guaxupe said it expects a cut of 4.5 million bags on initial projections of nearly 70 million bags for 2022 production.
Ganes, who has traveled to Brazil three times this year to check the drought and the frost, said it was too soon to speculate.
"There are a lot of aerial photos going around. But nobody knows if those trees will have to be only pruned, which will result in zero production next year, or need to be taken out, which means no production for two or three years," she said.
Eduardo Carvalhaes, a veteran coffee broker in the port city of Santos, in Brazil, said that coffee nurseries were also hit by the cold snap, which will complicate farmers' replanting plans.
Farmer Gonçalves, who believes he will need to take out around 80,000 burned trees, is not sure if he will find seedlings.
"I might need to plant corn in that area next year while I wait for trees to arrive in the market".
($1 = 5.1975 reais) (Reporting by Nayara Figueiredo in Sao Paulo, Marcelo Teixeira in New York and Maytaal Angel in London; additional reporting by Julia Symms Cobb in Bogota Editing by Marguerita Choy)
