Is Brazil preparing to corner the world coffee market?
As representatives of the Brazilian Coffee Institute (IBC), a government marketing agency, conceded in terse statements issued in three world capitals this week, Brazil is buying green unroasted coffee beans "wherever" it can find them - 800,000 bags from warehouses in New York and London and from the government of Colombia.
The substantial holdings of the Brazilian government trading company, Interbras, of the expiring September futures contract traded on the New York Coffee & Sugar Exchange also is cited by government and industry sources as evidence of a move to monopolize the market.
The Interbras holdings, the size of which are not known publicly, are of immediate concern to exchange officials and the federal agency which regulates futures trading.
In an unusual move taken to prevent a default of the September coffee contract, officials of the Commodity Futures Trading Commission and the exchange have made personal visits to Interbras and other firms with major "long" or buy side positions. Their request has been simple enough: liquidate slowly before the first delivery notice day so prices are not artificially inflated.
While some industry sources hesitate to apply the word "corner" to the Brazil buying spree, the London daily newspaper, The Sun, denounced that country in an editorial yesterday for "holding the world to ransom."
Some commodity analysts at leading brokerages in New York ascribe a simple motive to the Brazilian move - bolstering coffee prices that have fallen sharply this summer from the high of $3.40 a pound reached in mid-April to the $1.70-$1.85 range recently. Concern over the Brazilian moves triggered a 7 cent rise in September futures Tuesday, leaving that contract at $2.035.
But the Brazilians say price is not a factor; they just need coffee. Once the world's largest exporter of coffee, Brazil suffered a severe frost in 1975 which cut its production from 24 million bags to 6.4 million bags last year. While the expectations for the 1977-78 crop are for a harvest of 15.3 million bags of 132 pounds each, both domestic and foreign demand for coffee has pressured Brazil.
Brazilian Coffee Institute president Camillo Calazans de Magalhaes confirmed Monday that the IBC expects to receive 2000,000 bags of coffee on Saturday from New York. That coffee - which represents deliveries the IBC accepted under the July futures contract - is nearly all of the coffee certified for delivery against the expiring September futures contract.
Its shipment to Brazil could trasnform the specter of default on the New York exchange into reality.
This week the IBC also bought 500.000 bags of coffee in London and is negotiating to buy 100,000 bags from Colombia, the only producing nation which still has available stocks.
When Brazil shook the coffee market in early 1976 with its first imports of coffee in its history, it bought 500.000 bags - the remaining warehoused stocks in Angola, the world's fourth largest producer - for domestic use as instant coffee. That move permitted Brazil to export its own, higher-priced and better quality beans.
The IBC has yet to comment on its reason for importing the highest qualtiy Colombian beans, which are obviously not intended for domestic use.
Anyone who controls both the available physical (or cash market) supplies of a commodity as well as the spot or nearby futures contract virtually can name his price for that commodity.
The CFTC and exchange officials fear that Brazil is now in that position. Since Brazil has already taken delivery of the certified stocks in New York, however, it can not only force prices higher, it also may be orchestrating a massive default by those holding "short" or delivery side contracts.
The seriousness of the situation and the unusual personal visits made by regulators to futures market participants were dismissed casually by CFTC chairman William T. Bagley.
"We are not trying to lean on one side or another," he said. "We are just trying to find out what their positions (contracts) and whether they will be able to deliver."
The most vulnerable trading period of a futures contract is the brief time - usually 10 days - before a contract expires when those shorts who intend to deliver and those longs who intend to accept notify the exchange. The first notice day for the September coffee conteact is Aug. 25.
To wind up a futures transaction, a holder of a long position, whose contract permits him to "buy" the commodity, must liquidate by selling his position. A holder of a short position, whose contract permits him to deliver the commodity, Liquidates by covering the short by the expiration date would be in default and subject to penalties under federal law and exchange rules.
If the current holders of September long positions refuse to sell to the shorts in order to liquidate the open interest (the number of active contracts for that month), the shorts will be forced to buy the physical commodity and deliver the goods to the longs.
But there will be a problem in finding coffee of the growhts (country of origin) and grades certifiable for delivery under exchange rules since most of the available stocks were already sold.