Colombia’s coffee cooperatives face a ‘subprime’ crisis

Colombia's coffee cooperatives
  • Colombia’s coffee cooperatives have lost some $120m due to defaults on futures contracts
  • It has left many broke or in liquidation, with a number of cooperatives facing total collapse
  • Cooperatives are essential for the future of Colombia’s smallholder farmers

NEARLY 16 years have passed since the subprime mortgage crisis that triggered a global financial meltdown, and many of its lessons have been ingrained into the collective conscience.

The perils of hubris and optimism based on weak foundations, in particular, are now drilled into students of the financial world by those keen to avoid history ever repeating itself.

Yet recent events involving Colombia’s coffee cooperatives and its national association – the FNC – have drawn comparisons to the disaster that came to a head in 2007. “The subprime crisis in the coffee sector,” read the headline in one local paper following news that cooperatives had lost more money than they earned from a year of contributions.

Indeed, even a cursory glance at Colombia’s coffee cooperatives, which represent more than 550,000 farmers, is enough to know that they are in a bad way. 

Many are either broke or in liquidation having lost some $120 million over the last year due to a confluence of factors that saw many producers default on deliveries of coffee.

The problems stem from futures contracts agreed more than a year ago.

With the price of coffee on the C market relatively low up until April 2021, coffee producers found themselves in a vulnerable position.

To encourage production and mitigate against the unfavourable market conditions, the FNC signed futures contracts with the producers from its 33 cooperatives, which guaranteed a set price of $1.30 per pound of green coffee.

However, when the C price climbed to more than $2 per pound, producers began to massively default on their agreements. This, in turn, meant the cooperatives also defaulted on the FNC and other exporters.

“If a producer says, ‘I’ll sell you 500 bags for next year’s crop’, you will do a futures sale or a forward sale,” says Albert Scalla, vice president of trading at StoneX.

“What they didn’t contemplate was that the prices would continue to go higher. When prices got higher at the time it came to deliver the coffee, producers defaulted because the local prices went higher than what was agreed.”

Perilous position

With no clause regarding price rises, cooperatives couldn’t force producers to fulfil contractual obligations. Instead, the cooperatives took the hit and agreed to pay them higher prices, before selling it on to the FNC and other exporters at the lower agreed price.

“Coffee growers are not willing to lose the opportunity to improve their income,” says Felipe Robayo, a consultant and green coffee trader, “and for this reason they are breaking the commitments they made with the cooperatives.”

It’s believed that last year less than 10% of futures contracts were fulfilled.

Unsurprisingly, cooperatives have been significantly affected by the financial hit and risk collapse. This is an outcome that Albert explains would have huge knock-on effects for coffee production in Colombia, which is made up predominantly of smallholder farms.

“Losing that coop channel is detrimental for the producers,” he says. “If I am a small producer, I need the assistance, all the services a coop provides me. You lose affordable fertilisers and all the logistical assistance that a coop provides.”

Indeed, without cooperatives, many smallholders will have no way of processing their coffees, especially during the harvesting season when considerable labour and expensive infrastructure is required.

Cooperatives help lighten the workload by taking the cherries and processing them, leaving the farmers to focus on the all-important harvesting. Well-managed cooperatives also advance some loans for farm maintenance and labour needs which is crucial to maintaining a good farm and by extension good quality coffee.

By offering training and farmer education, they improve the yields and farmers learn good agricultural practices. Without these advances, some producers cannot manage to smoothly run their farms, thus leading to lower production and a disrupted coffee value chain.

In worse case scenarios, it can lead to farmers losing their livelihoods, as many depend on the earnings from the coffee they deliver to the cooperatives as their only source of income.

Lessons learned

The collapse of the cooperative system that has for so long sustained Colombia’s coffee producers is an unwelcome thought.

However, Colombia isn’t the only country where the model is failing. In Kenya, for example, cooperatives have struggled to attract new, young members, leaving an ageing and unrepresentative system in place.

However, there are solutions and ways to protect against events similar to what happened in Colombia. For one, cooperatives must understand the nature of the market they are going into when agreeing to contracts.

“The coops need to understand their exposure to the risk of price volatility,” Albert says. “All those contracts they did and the modalities of forward or futures contracts need to have another instrument, an insurance product. A variable sale structure allows for flexibility of fixing a price, for example.”

In the case of Colombia specifically, Felipe believes that a departure from the FNC’s framework could also help.

This is in light of reports that the futures contracts made by the FNC didn’t formally exist and that only in recent months has it begun formalising the purchase intentions that cooperatives made through WhatsApp over the last two years.

“The creation of a true futures contract, such as the New York one, but managed by a private stock market such as in Brazil, but not by the FNC, would help greatly,” Felipe explains.

Some also suggest that a movement towards “collectives” rather than cooperatives might also hold long-term solutions, similar to what is emerging in Kenya. In this system, the members are usually estate producers who have licence to process and market their coffee.

The collective members act as a company, with limited liabilities and enjoy benefits of scale, such as fulfilling contract demands such as container full-load.

Whatever the answer, it will take a long time for Colombia’s cooperatives to pick themselves back up again, and some have already experienced bankruptcy.

One can only hope that, like the subprime mortgage crisis, the right measures are taken to prevent a similar scenario. And that all the lessons from this one are learned.