CIB forced to borrow to support cash-strapped coffee dealers
Published:Friday | February 25, 2011 | 12:00 AM
The Coffee Industry Board (CIB) has borrowed short-term funds amounting to J$310.5 million from two state-run bankers to finance the purchase of green beans that otherwise would have been left to rot as buyers retreat from the market.
The funds will not benefit the CIB, but will support coffee dealers such as Wallenford Coffee Company Limited, Blue Mahoe Estate and others, whose business model of funding operations from prepayments have left them short of cash in a down market.
The dealers need the working capital support, said CIB director general Chris Gentles, because their usual source of funds for bean purchases - advance payments for cherry coffee from international buyers - were cut as demand for coffee fluctuates on the world market.
Gentles said Monday that the monies, borrowed from the Development Bank of Jamaica (DBJ) and EXIM Bank Jamaica, will be repaid from 60 per cent of the proceeds of bean sales, with revenue going directly to the banks.
"When the sales from the coffee beans are realised - they will generate sales from J$850 million to J$1 billion - the proceeds of this revenue, or any part thereof will be used to repay the loan, and complete the payments to farmers and processors," said the coffee board head.
Bullet payment
The DBJ loan for J$214 million at interest of 10 per cent per annum, which was approved by the bank's board on December 16, is due in one bullet payment of principal and interest in nine months, with potential for extension to one year, while the EXIM loan for US$1.064 million is priced at 7.5 per cent per annum and due for repayment in nine months.
Gentles said that already J$70 million has been drawn down from DBJ and US$220,000 from EXIM.
The DBJ loan is secured by mortgage on 2,877 acres of agricultural property located at Amity Hall, St Catherine; the pledge of cherry coffee purchased with loan proceeds and green beans held in inventory for sale; and the assignment of benefit of contract of order/shipments of the pledged goods held in inventory.
Gentles said the loans were sought to purchase beans from the 2010-11 crop at the behest of the Ministry of Agriculture and Fisheries, after several depots that buy cherry coffee in the Blue Mountains closed temporarily in the last quarter of 2010.
"This is a short-term liquidity problem caused by the licensed coffee dealers being overly dependent on the market for the funding of purchases of the coffee," said Gentles.
The coffee board, starting in 2006 when Graham Dunkley was head of the CIB, "has made interventions requesting that coffee dealers engage the international capital market for funding with the assistance of PricewaterhouseCoopers," said Gentles. "When the markets re-engage, then bankers will scramble to finance the crop."
Undercapitalised Wallenford, which is 100 per cent owned by the Government, has been receiving support since the decision to divest the loss-maker. The company is running a J$1.5-billion deficit.
"The Government decided that Wallenford and the Coffee Industry Board would be two separate companies, where CIB would be a regulator, and the Wallenford Coffee Company would be the government-owned licensed coffee dealer. Wallenford has had to make several loans in the course of their business."
Loan distribution
The CIB loan proceeds will finance first payment of J$1,500 per 60-pound box of Blue Mountain coffee to each farmer, J$1,000 per box for high mountain coffee, and $800 per box to the dealer to cover associated expenses.
Gentles said on Monday that beans purchased under the programme, "will be sold to the clients of the licensed coffee dealer", that 60 per cent of the proceeds will be allocated to the banks, while the balance will cover loan administration and processing costs, and pay farmers.
The first disbursement was made on December 23, in the amount of J$114 million, while another J$33.81 million was paid on February 11 to farmers for coffee delivered betweenDecember 9 and January 21 and bought by Wallenford.
CIB is now arranging the sale of 50 tonnes of coffee to Ueshima Coffee Company Limited, which will complete supply delivery of 95 per cent of the exportable coffee from the 2009-10 crop.
Green bean coffee prices have moved from US$27.50 per kilogramme to US$25.30, while the non-premium category earned US$20.59 per kg, representing a reduction in revenue for coffee dealers and farmers.
The CIB advises that the industry will be negatively affected unless some intervention is made on behalf of farmers whose ability to replant will be impacted by delayed and diminished payments.
"In an environment in which they used to get $2,300 as advance payment, they are now getting J$1,500," said Gentles.
"Field management, reaping, floating, delivery, and all of the other practical requirements of producing the crop will be affected. There will be an impact on caring for the field in the usual manner," he said.
Gentles said the coffee board has been showing farmers ways to reduce expenses, but has also advised the agriculture ministry that there will be "a fallout" unless someone intervenes.
The coffee industry includes 7,500 farmers producing Blue Mountain coffee and 1,500 growing high mountain; it employs 100,000 workers, including 20,000 on a seasonal basis.
The value of coffee output in 2009, the most current data available, was J$1.5 billion, with exports valuing US$33.8 million.
The CIB has engaged the Association of Japanese Importers of Jamaican Coffee (AJIJC) as adviser on improving sales of Jamaican coffee," Gentles said on Monday.
Following the price cuts, "the AJIJC has responded that there will be a more aggressive take-up of shipments of coffee this year."