Vietnamese coffee companies are using “reconciliation” or differential selling method and this method dents their earnings.
Reconciliation eats into profit
In 2010, Vietnam's coffee export valued roughly US$2 billion but many coffee companies did not make good profits, even operate at a loss. This is a paradoxical lesson for Vietnam's coffee industry. Giving reasons for this reality, many experts blamed differential or reconciliation selling method.
Differential is the business method that allows the buyer or the seller to strike a price at some point in the future. If a domestic company sells coffee to a foreign company at a price in the future and subtract a sum. For example, a company signs a deal to sell coffee at US$2,200 per tonne and the differential or reconciliation is US$50 per tonne; the actual selling price is US$2,150 per tonne. The differential, up or down, depends on anticipation of Vietnamese companies about the market trend, basing on the current price.
According to traders, this sum arises because the quality of Vietnamese commodity is not actually guaranteed and the delivery is unpunctual, etc. Besides, Vietnamese companies need capital for their business operation and the “differential” method will bring in a contract for them, a condition to borrow money from banks.
Mr Doan Xuan Hoa, Deputy Director of Agroforestry, Fisheries and Salt Industry Department under the Ministry of Agriculture and Rural Development, said: In the 2009 - 2010 crop, most Vietnamese coffee companies accepted the differential method, with a big rate of differential, on anticipation that prices will rise. Unfortunately, prices did not gain. Without a temporary storing program, with 200,000 tonnes of coffee stockpiled, prices would have fallen more.
Mr Do Ha Nam, President and CEO of Intimex Import Export Joint Stock Company, said: This "reconciliation" method resulted to a price competition of domestic coffee firms. To have contracts, sellers had to offer bigger rate of differential.
Mr Luong Van Tu, President of the Vietnam Coffee and Cocoa Association (Vicofa), expressed his deep concerns that many companies prefer this method although it led to huge losses for sellers. Meanwhile, the damage of the coffee industry is not limited to enterprises but also coffee growers.
How to put a stop to differential trading
According to an official from the Ministry of Agriculture and Rural Development, to put an end to differential or "reconciliation" selling, the Government should have policies to provide enterprises a wider access to capital sources to maintain production and business activities.
Mr Nguyen Thanh Bien, Deputy Minister of Industry and Trade, said: In the long term, Vietnam should establish coffee export insurance fund or temporary storing programme.
Mr Nam added that companies must be professional; the quality of coffee must be guaranteed; and delivery must be on time to stop using differential selling method. To ensure the quality of coffee, companies must inform growers not to pick unripe fruits.
According to some experts, foreign traders typically use financial capacity to force prices down. Thus, Vietnamese exporters should unite and agree on a common price to be strong enough to put off pressures from foreign speculators. When the price falls, they should say no to differential contracts but spot contracts.
Lan Trinh
Vietnamese
