Defaults and the Vietnamese coffee industry

April 20 (Reuters) - Coffee prices have risen tentatively after slipping to a low in mid-March, putting pressure on buying agents in Vietnam who had sold forward stocks to exporters on margin at low prices.

Liffe benchmark robusta coffee futures LRCc2 ended the first quarter at $1,356 a tonne, up $24 or 1.8 percent from the end of 2009. Dealers said the market has been underpinned by plans by Vietnam to stockpile coffee which helped offset the bearish impact of ample supplies.

Following are some key facts about coffee production and trade in Vietnam, the world's second-largest producer after Brazil and the largest producer of the robusta variety, used for making instant coffee.

HOW BIG IS THE INDUSTRY IN VIETNAM?

Coffee was first cultivated in Vietnam about 150 years ago, but it didn't take off until the 1990s when the Communist economy started to open up to the outside world and the government encouraged coffee growing. This year, Vietnam is expected to produce about 18-19 million 60-kg bags of robusta, or about 15 percent of the world's total.

Some 80 percent of what Vietnam produces will come from the plantations of squat, gnarled trees in the fertile and cool Central Highlands region some 300 km (190 miles) northeast of Ho Chi Minh City near the borders with Cambodia and Laos.

Vietnam's coffee crop year lasts between October and September and starts with the harvest that lasts four months, peaking in late November.

Vietnam has around 150 coffee export companies, with the largest firms including Vinacafe, Intimex and Thai Hoa group, industry reports said. They buy beans locally via their own network and buying agents.

HOW DOES THE EXPORT MARKET WORK?

There are three main links in Vietnam's export chain: farmers, buying agents and exporters.

Farmers harvest and dry the beans then transfer them to middle men, or buying agents. The agents then strike deals with bigger agents, or directly with exporters, who load and ship the beans for foreign trading firms, roasters' suppliers.

Farmers can sell their beans to the buying agents before, during or after the harvest, depending on their demand for cash for things like hiring workers to pick cherries in October-January or buying fertiliser, and fuel for watering trees between February and April.

There are three ways farmers deal with agents.

A small percentage of relatively wealthy farmers sell part of their coffee stocks directly in physical trade.

In other cases, farmers agree to sell coffee to a buying agent before the harvest starts at a fixed price, normally lower than the market levels at the time. They get some cash in advance, then collect the rest after delivering their beans to the buying agents.

Another more risky but popular method is for farmers to deposit beans in buying agents' warehouse and fix the price only when they see gains in London futures markets. One trader estimated 30 percent of the total coffee trade in Vietnam was done through such deposits.

HOW DO BUYING AGENTS OPERATE?

Buying agents have been hedging their risks by signing outright or forward deals with exporters. Under these deals, if prices drop the middlemen make a profit, but if prices are up at the time of delivery, they face losses as they have to buy beans at higher prices.

Buying agents can deposit beans with exporters and get advance cash. Many also get seasonal bank loans, mortgage their property or get cash advances from exporters, usually around 70 percent of the total contract value.

"When market conditions are normal, this is the best way to trade," a Daklak-based trader said.

But when bank credit is tightened, as has been the case so far this year, and coffee prices are volatile, exporters have the risk of losing their advance cash if the crop output is less than expected or buying agents fail to deliver due to payment defaults with farmers.

This year, so far, industry insiders say some 200,000 tonnes worth of coffee for export, or about a fifth of the expected output, has faced delays or defaults for this reason.

With prices now rising, a new wave of defaults could be in the making as buying agents face pressure from farmers seeking payment.

HOW DOES VIETNAM PRICE ITS COFFEE EXPORT PRICES?

Based on Liffe robusta futures, Vietnamese exporters offer beans on a free-on-board (FOB) basis normally at a discount, which is widely accepted by foreign buyers as a way to hedge risks, such as delays or quality problems.

FOB prices can also be determined by adding to the price in the Central Highlands region exporters' cost for processing, transportation, packing, lending and their profit.

Vietnam mostly uses a dry processing method, by the sun or over the drying oven, for robusta beans, which is cheaper than wet processing more popular in top producer Brazil.