Vietnam coffee sector battles through highs and lows in 2023
Global coffee prices increased in 2023, but traders and exporters endured a stressful year, and international buyers now recognize that Vietnamese robusta supplies are no longer limitless, writes Phan Minh Thong, general director of Phuc Sinh Group, a leading coffee exporter in Vietnam.
Phan Minh Thong, general director of Phuc Sinh Group. Photo courtesy of Phuc Sinh.
Coffee prices began to rise at the start of 2023. After years of stasis at $1,200-1,400 per ton, global coffee prices have risen to $1,900-2,000 per ton. Everyone was happy, especially farmers.
From the magic number of VND34,000 ($1.39) per kilogram of raw coffee, prices rose to VND42,000 ($1.72) and then VND44,000 ($1.8) per kg. Supply was abundant, but businesses were concerned about the affortability.
Vietnam has long been the world's leading producer and supplier of robusta coffee, and the rest of the world has become accustomed to purchasing Vietnamese robusta at low prices. Roasters throughout the world had updated their recipes, with Vietnamese robusta being the most common ingredient. Famous European and American brands were selling coffee at good to very good prices, with low input costs for Robusta from Vietnam.
Coffee purchasers around the world were overjoyed because the supply of Vietnamese coffee was abundant and cheap, and many believed supplies would never run out.
After Lunar New Year 2023, supply remained robust, and coffee prices fluctuated from VND42,000 ($1.72) per kg to VND48,000 (1.97). For the first time in 15 years, coffee costs had risen to a new high. Farmers and small suppliers sold large amounts, and when the price reached VND50,000 ($2.05) per kilogram, practically all farmers had sold out. Traders and small suppliers also emptied their warehouses.
Everyone in the coffee industry saw it as a fantastic price and assumed that it couldn't go any higher. The quantity of sales was enormous, and coffee dealers from warehouses, small suppliers, and large exporters assumed supplies would last.
At a price of VND50,000 ($2.05) per kg, many large companies did not want to buy because they thought it was too expensive compared to previous years, so they bought in moderation.
Not only did large coffee importers believe this, large traders and the majority of Vietnamese exporters believed coffee was still available, however, in May 2023, coffee supplies became very scarce. Buying coffee was far more challenging, but neither exporters nor roasters expected that Vietnam would experience a coffee shortage in 2023.
This was understandable because for decades, when farmers or suppliers in raw material areas said there was a crop failure, the export output did not change much, and they could always buy coffee. If farmers didn't sell, they only had to wait two or three days to buy coffee again. If traders can't buy that price, they can just pay VND200,000 ($8.19) per ton more to buy. Vietnam produces 1.7–1.8 million tons of coffee each year.
However, in 2023, coffee costs rose, beginning in mid-May. Supply was no longer ample, but monthly export contracts remained as plentiful as ever.
In June 2023, buyers began to put pressure on exporters, and the entire market was surprised: Vietnam had run out.
With decades of experience in the coffee industry, we had seen that when coffee ran out, exporters normally had to wait a few days or a week to get more, but this did not happen in 2023.
For the first time in the 25-30 years, numerous surveys of coffee raw material areas were done. The coffee warehouses were nearly empty, with only a few bags, and there were so many questions about why this happened.
International buyers became concerned when commitments to deliver coffee went unfulfilled because very few batches of coffee were supplied. They became impatient. They applied pressure on exporters and organized visits. They visited the representative offices of foreign coffee firms in Vietnam first, then warehouses in raw material areas before going to export companies' offices to seek answers. However, they simply received the response that exporters would attempt to purchase and deliver.
In fact, the buying volume was relatively low, and exporters could not supply much. So it was the overseas parent company's time to exert pressure on the Vietnamese office. Then, roasters and buyers from abroad requested deliveries, but the situation was not good because Vietnam had ran out of coffee.
For the first time in more than 20 years in the profession, we saw purchasing managers, traders, and coffee brokers exhausted. They were under pressure from their bosses as well as buyers with whom they had contracts.
Exporters were also struggling since there was no coffee to buy, resulting in no goods to deliver. Following that, coffee-buying firms began demanding reimbursement from exporters, and they continued to apply pressure. From July to October 2023, exporters faced intense pressure from both buyers and suppliers. Everyone was reeling because they were unable to function without coffee.
International buyers who had previously been familiar with Vietnam's unlimited supply of robusta came to the country to survey and were surprised to find empty coffee warehouses everywhere.
To explain the lack of coffee, we must first realize that Vietnam has grown quickly over the last decade, with real estate being one of the most developed sectors. Land prices have ranged from VND200-300 million ($8,200-12,295) per hecta during the last 10 years, but are now at $2-3 billion ($81,967–122,950) per hecta.
Every year, coffee farmers sell a little bit of land, which adds up over 10 years, causing the coffee growing area to drop dramatically. After the Covid-19 epidemic, fewer people worked in agriculture, labor expenses rose, and variable weather conditions cause significant agricultural changes. These three variables led to a major decline in coffee output.
In January 2024, the coffee business saw several unforeseen developments. When surveyed, everyone believed that this year's 2023-2024 crop was strong and began selling hundreds of thousands of tons in advance. Farmers and suppliers in raw material locations supplied coffee in huge numbers for VND50,000 ($2.05) per kilogram, after which the price rose to VND52,000 ($2.13) per kilogram and VND54,000 ($2.21) per kilogram.
Farmers refused to supply goods to dealers they had deals with as coffee prices continued to rise. Traders who had not delivered goods continued to disrupt warehouses and exporters, throwing the coffee sector into disarray. In the Central Highlands, many coffee businesses went bankrupt. The situation disrupted the coffee industry's decades-long business model. Many coffee supply companies in raw material areas will continue to fail, prompting exporters to confront numerous challenges and declare bankruptcy.
Besides, if coffee prices rise, smaller roasters will suffer. The coffee roasting industry is likewise intensely competitive, with many small and medium-sized roasters forced to sell inexpensively in order to get access to supermarkets and retail networks. Input costs are rising, but selling prices remain unchanged, signaling the demise of the small and medium roasting business, which had relied on inexpensive Vietnamese robusta coffee for many years.
There are also claims that farmers are greedy. Coffee costs VND78,000 ($3.2) per kilogram, yet they still refuse to sell it. It should be noted that everyone is greedy, not just farmers. For decades, they have marketed it inexpensively, and we believe it comes naturally. However, we came to learn that nothing lasts forever. Farmers have reasons for doing this, and we must acknowledge the situation in order to adapt our business plan.
However, looking back over the coffee industry's 20-year history, we can see that large coffee roasting and distribution corporations around the world have taken advantage of cheap Vietnamese coffee to make huge profits. After decades of tremendous profits, they have compelled their vendors, from exporters to merchants, to pay late, ranging from 150 to 360 days. It seems funny, but it's completely accurate.
When drafting contracts, they require exporters and traders to pay interest for 150 to 360 days of late payments. Multinational corporations obtain significant tax breaks and now force homeowners to pay half a year to a year late. The same is true for large customers in the spice market, including pepper. They are already wealthy, but with this business model, they will become even wealthier!
The same goes for delivery. When the harvest is plentiful and customer demand is low, large corporations are willing to force exporters to deliver 3-12 months late, even if exporters have purchased full warehouses. If exporters continue to deliver, they will not be compensated, and it is difficult to claim that their warehouses are full when their customers are spending less. However, when the contrary occurs and they require supplies, they push us really hard.
Doing business is already challenging, and it is becoming increasingly difficult. Export enterprises have no choice but to accept this without recompense.
However, life has always had its own reasons. After 2023, consumers will recognize that Vietnamese robusta is no longer limitless, and they must pay close attention to Vietnam's market. And the answer is that for the coffee industry's long-term sustainability, both buyers and sellers must show respect for coffee, coffee growers, and growing areas. To develop this industry responsibly, large coffee firms around the world should be less greedy and collaborate with exporters and coffee farmers.