Farmers in the central highlands province of Kon Tum's Kon Ploong District harvest coffee. VNA/VNS Photo Dư Toán

In the first months of this year, the price of domestic coffee has been steadily rising. Currently, domestic coffee prices are hovering around VNĐ95,000 (US$3.8) per kilo - more than double the rates from the same period in 2023. While this trend is favourable for farmers, export businesses encounter significant challenges.

When prices reach excessively high levels, the raw material supply chain faces the risk of disruption, as some units and customers are unable to obtain necessary goods. Moreover, escalating coffee prices impose additional financial burdens on businesses, exceeding their plans.

In November 2023, coffee prices ranged from VNĐ59,000 to VNĐ60,000 per kilo. However, in December 2023, they had already climbed to VNĐ62,000 to VNĐ69,000 per kilo. In January 2024, prices skyrocketed further, reaching VNĐ70,000 and VNĐ82,000 per kilo. As of early March, the prices surged to VNĐ86,000 per kilo, and they have now escalated to a staggering VNĐ95,000 per kilo. The rapid and substantial increase leaves many businesses unable to cope.

Such a dizzying price hike resulted in certain orders, whether on credit or placed in advance, being non-deliverable. Consequently, companies were compelled to allocate additional funds to compensate for their losses.

The dramatically rising coffee prices in recent months have led companies to adopt stricter purchasing practices and buy in moderate quantities. Additionally, partners are requesting shorter delivery times to ensure a stable supply and avoid price risks. Many coffee export businesses are struggling to meet deadlines for contracts signed before the sharp increase in input prices. This has resulted in financial pressure, product shortages and higher transportation costs. Due to concerns about market price fluctuations, numerous coffee production and trading businesses are reluctant to accept additional unplanned or distant orders and contracts.

According to Nguyễn Ngọc Luân, founder of the agricultural coffee brand Meet More, when offering and negotiating with a distributor in South Korea, the price of purchased coffee ingredients was only VNĐ40,000 - VNĐ45,000 per kilo. The price now has doubled, raising processed product prices.

He added that the time between contract signing and delivery spans approximately seven months. The company has entered into a one-year contract to fulfil the order with the new customer. Despite supplying at a price that is 5-10 per cent lower than their production cost, they are committed to completing the contract. The company would communicate new prices to customers in July, taking into account the prevailing cost of production input materials.

In addition to serving customers in South Korea, the company has also undertaken contracts with several clients in Australia and the US. The initial price agreed upon at the time of contract signing was significantly lower compared to the current market rates, making them to bear losses.

Likewise, Nguyễn Đức Hưng, the General Director of Napoli Coffee, has observed a rapid increase in input material prices for coffee processing. This surge has significantly impacted the company’s production costs.

In addition to selling product in the domestic market, Napoli’s processed coffee products have been selling in dozens of international markets. However, the company faces a challenge as the raw materials stored in their warehouse fall short compared to the contracted quantity.

According to Hưng, in the next month's price quote, the company will adjust the price by 5-10 per cent, while coffee ingredients have increased by more than 50 per cent.

With this price increase, the company may lose a few customers because importers may not accept the price increase. However, if the current selling price is kept, the more the company exports, the more losses it will incur.

At the current raw coffee price of around VNĐ95,000 per kilo, the company expects to incur losses in the tens of millions of Vietnamese đồng per tonne of processed coffee. This deficit could escalate if export quantities continue to grow.

In years when coffee prices do not exhibit these shocking fluctuations, purchasing raw materials is quite easy for businesses. Currently, the price of raw coffee is increasing despite the rules, making it impossible for businesses to react in time.

He added that most domestic coffee processing enterprises operate with thin financial margins. Their ability to accumulate substantial reserves for long-term production remains challenging, resulting in immediate vulnerability to high raw material prices.

Exporters in chaos as prices soar

To take advantage of this price hike, farmers have reneged on deals signed with wholesale agents who would normally supply coffee to exporters for a fixed price, causing widespread market chaos, according to Phan Minh Thông, general director of Phuc Sinh Group, one of leading coffee exporters in Việt Nam.

Farmers normally sell around half of their produce ahead of the harvest, but this year they are only allowing a trickle of supplies through to agents as they wait to renegotiate at higher prices.

According to businesses and industry experts, the surge in domestic coffee prices can be attributed to the scarcity of global supply, with Việt Nam being largely alone in the market.

The adverse effects of climate change, specifically the El Nino phenomenon, have led to drought conditions across coffee-growing regions worldwide. In Việt Nam, during the 2023-24 crop season (from October to the following September), there has been an estimated 10 per cent decline in output.

At present, numerous financial speculators worldwide have turned to coffee (following oil and gold) as a speculative investment, resulting in rapid price increases.

Thông added that many coffee exporters have been compelled to make claims for thousands or even tens of thousands of tonnes of purchases, with some even receiving deposits but failing to receive the goods as promised.

In a situation where prices are favourable, if export or foreign companies sell in advance but do not receive the purchased goods, the losses incurred could be enormous, he added.

As the coffee market is unpredictable, Nguyễn Nam Hải, chairman of Việt Nam Coffee Cocoa Association (Vicofa), said coffee processing and exporting businesses closely monitor market dynamics and maintain a balanced approach to sourcing their goods.

Given the current circumstances, Hải suggests that export enterprises with pre-existing forward export contracts should minimise the risk of losses by adopting a strategy of immediate purchase and sale, rather than entering into further forward sales agreements as previously practiced. Coffee prices are experiencing daily increases, making the risk associated with forward sales particularly high for businesses.

Amid the rapid escalation of prices, industry experts emphasise the importance of proactive planning for businesses. They recommend establishing strong connections and developing raw material areas to ensure a stable supply of goods and create specific order plans. These measures will enable businesses to avoid passivity, prevent losses and even potential contract penalties.

Coffee exporters and other agricultural product businesses must prioritise collaboration and linkages to establish their own raw material areas. By doing so, they can mitigate the risk of supply disruptions when market demand surges, ensuring a consistent supply of raw materials for their export operations. — VNS