The rally in coffee prices has led Montesanto Tavares group, a major Brazilian trading company, to seek protection from creditors, exposing how skyrocketing prices of the commodity have drained traders’ capital—an issue that could spread to other industry players.
Montesanto, which owns leading traders such as Atlântica Coffee and Cafebras, filed for pre-bankruptcy protection with a local court last week, citing surging margin calls on derivatives as the tipping point of a financial strain that began in 2022 after an unprecedent loss in Brazilian arabica farms.
Over the past three years, the Minas Gerais-based group has grappled with excessive defaults, driven partly by farmers rolling over deliveries after crop failures. Since 2019, Montesanto Tavares has been left short of 900,000 coffee bags—valued at 1.8 billion reais at current prices—out of 2.7 million bags purchased for future delivery. To honor contracts with importers, the company was forced to source coffee elsewhere, often at a premium.
The situation worsened this year as soaring cash demands to cover daily margin calls intensified. Coffee traders typically secure future delivery contracts with farmers by selling contracts on the futures market, requiring deposits when coffee prices rise—the so-called margin calls.
With arabica coffee prices up nearly 60% on the New York Stock Exchange this year, Montesanto Tavares reported that its margin call obligations surged from 50 million reais in May to nearly half a billion reais in November, exceeding its receivables.
For a company generating 3 billion-reais in annual revenue, the cash flow strain became unsustainable. “The constant margin calls rendered the short-term cash structure unsustainable,” the company said in its debt restructuring request.
Brazil, the world’s largest coffee producer and exporter, has been struggling to recover after severe drought and frost hit the 2021/22 crop. This year’s harvest fell short of expectations due to issues with coffee beans size. Meanwhile, other major producers, including Colombia, Indonesia, and Vietnam, faced climate-related setbacks.
Geopolitical conflicts, particularly in the Red Sea region, have disrupted key coffee export routes, boosting demand for Brazilian coffee. Furthermore, the European Union’s anti-deforestation law has added pressure, with traders bracing for its impact on global trade.
“The main issue is that coffee prices haven’t stopped climbing since 2021,” said Guilherme Morya, a coffee market analyst at Rabobank. “In an extremely volatile market like this, traders need robust structures. Those with higher exposure have suffered the most.”
Ripple effect
Montesanto Tavares’ episode spurred concerns that other industry players may be facing similar financial troubles. Smaller and mid-sized trading companies, with less resilience to financial shocks, are seen as particularly at risk. Earlier signs of distress included the bankruptcy filing of Mercon Coffee Corporation in the U.S. less than a year ago, with debts exceeding $360 million.
Larger firms such as Louis Dreyfus Company (LDC) and Olam are better covered due to diversified operations and stronger capital structures. However, there are some market talks suggesting that even some major international traders have lost access to banking credit lines.
“Multinationals can afford to absorb this disparity. Smaller and mid-sized players, however, might struggle, creating an opportunity for larger companies to acquire financially distressed smaller ones. The trend is toward consolidation,” said Bruno Giestas of Real Cafés, one of Brazil’s leading soluble coffee companies based in Espirito Santo, a robusta producing state.
For another industry source, Montesanto Tavares’ struggles cannot be seen as systemic. Since 2022, many trading companies have reduced their open positions, a direct reaction to the challenges of rolling over delivery contracts after the crop failure reported in that season.
“It was common for trading companies to work with extremely long-term contracts, for delivery over five years, which was very risky as futures market contracts typically have maturities of up to three years,” the source said. “Traders’ exposure has declined since 2022 issues.”
A new frustrating crop
The outlook for 2025 is equally concerning. Despite a promising flowering earlier this year, prolonged dry conditions before the spring rains have led flowers to drop, signaling a potentially smaller-than-expected harvest.
That means global supply-demand dynamics could tighten further next year. The USDA recently revised its 2024/25 Brazilian coffee crop estimate downward by 5.8% to 66.4 million bags, citing adverse weather.
“The losses in arabica coffee are massive, possibly the largest ever recorded in Brazil,” said Regis Ricco, director of RR Rural Consulting based in Minas Gerais state.
Market uncertainty will likely persist into early 2025 as traders assess crop conditions, maintaining volatility. “The balance of supply and demand looks set to worsen,” said Gil Barabah, an analyst at Safras & Mercados consultancy.
