A twist of fate between two children in a game of win or lose, only rewarded with an ice cream, then the loser broke the deal. Sometimes, these two kids would be angry with each other for a whole week. In the agricultural trading business, this “twist” is sometimes just a phone call, but the business community considers it a promise that must be kept. If further, the proactive party will record the conversation, but both parties implicitly consider it a “contract” and when the delivery deadline arrives, it must be fulfilled.
For the past few months, on social media and in the press, there have been numerous reports of contract breaches, broken promises, and defaulted payments… Many places have had to involve authorities because of “signs of fraud” in the agricultural trading sector… Business people who read these articles feel stressed, farmers find themselves insecure, and the social security in some agricultural production and trading areas has been disturbed.
Breaking the deal: a bad business habit that needs to go
Breaking the deal in business means failing to fulfill one or more contracts for delivering or receiving goods, even if one party has already received or has yet to receive a deposit payment based on a certain percentage of the total contract value. In plain terms, this is called “dishonest contracts”.
Last year, a trader from Dong Nai came to Buon Ho district, Dak Lak province, and made a deposit of VND 300 million to buy durian trees with a total value of VND 600 million. After harvest, the buyer had to pay the remaining amount. However, when the labor and vehicles came to pick the durians, the fruits on the trees were gone. This breach of contract was taken to the local court, and the buyer had to pay legal fees and won the case. The seller appealed and escalated the case to a higher level. The buyer calculated that if they continued with the lawsuit, they would not only lose the VND 300 million deposit but also face additional costs for the legal proceedings, hotel expenses… which could amount to more than the deposit itself, so they had to give up and accept the loss. The reason for breaking the deal was that the price of durians had suddenly skyrocketed, and the seller had received the deposit money but continued to “disappear” without any “regret”. Meanwhile, the buyer could only sigh and say two words: “destiny’s payment”.
The agricultural commodity market in our country is truly admirable, but what is the point of large-scale production when there are actions such as breaking deals and causing a domino effect, ultimately heating up both the domestic and international markets.
Breaking the deal often occurs when the price of a certain agricultural commodity fluctuates dramatically. If the price increases, the seller backs out; if it decreases, the buyer refuses to take delivery. This phenomenon has been happening for ages in various ways, from bananas, betel nuts, to fish traps… to the point where sellers say, “I will sell to whoever gives the highest price, and I will buy if the price drops” even though they have promised their partners “an eye for an eye”.
Breaking the deal is a bad business habit that needs to be eradicated. Therefore, in any form, instead of defending it, society as a whole and professional associations need to condemn and rectify it. If possible, find a way to bring the practice of breaking deals in business within the framework of the law and explore all means to regulate it since for a long time, “dishonesty in business” has often been “pardoned” and classified under “moral obligations”.
Breaking the deal undermines the sustainable structure of the market economy
Some people may react by saying “why so harsh”. In agricultural supply chains, Vietnam is a leading player, even in world markets such as rice, coffee, pepper, and other spices, rubber, wood and wood products, aquatic products… Many international business people have stated that the reason they come to Vietnam to buy agricultural products is because Vietnam has a lot of influence and is a “reference” for the very products they trade.
Indeed, since February 3, 1994, when US President Bill Clinton completely lifted the embargo, many agricultural products have had the opportunity to develop production, rapidly advancing and gaining a strong foothold in the market. The market “nurtures” the agriculture and commodity sector, and breaking a deal clearly damages the interests of partners and the overall market. Not to mention the worse consequences when “dishonest contracts”, trade of certain agricultural products is stalled and can be boycotted or blacklisted by many potential customers due to their “fear of risks” in dealing with those products. The consequence is cutting down the risk premium in future contracts.
For commodities traded using and through futures exchanges often referred to as “commodities”, such as rice, coffee, rubber, cotton… breaking the deal has a significant impact both at the time of breaking the deal and afterward.
International business people with substantial capital and significant influence in the commodities market use futures exchanges as a financial instrument to protect themselves. When they purchase tens of thousands of tons of rice, thousands of tons of coffee, etc., they immediately hedge their transactions on the exchange. In other words, they use futures contracts as a means to avoid price fluctuations when taking delivery. By doing this, they “lock” their profits. Suppose they earn $30 per ton. Through price protection, their profit would be fixed at that amount regardless of price fluctuations.
Traders today are not “wholesalers” – a term used for “merchants, traders” – as it was the case hundreds of years ago.
Traders usually go wherever they can find cheap goods to buy and sell, carrying just enough quantities for resale to other places that need the goods in order to make a profit. The role of traders is important in an emerging market as they help ensure the flow of goods from production areas to areas in need. However, nowadays, particularly with commodities traded through “commodity” exchanges, this group only benefits when they need to rescue a product that is congested in a small market, but what is detrimental is that this group often takes advantage of a sudden price surge, jumping in to buy as if it were “picking up bargains”.
Many domestic agricultural exporters also use a similar method to sell goods to foreign traders. Therefore, do not assume that they are “making a fortune” due to the rising prices on the futures exchange and making a lot of profit, like “earning money hand over fist”. If farmers and agents break the deal, not only will the sellers be unable to fulfill the delivery, but they will also suffer significant losses, pay penalties, and, worst of all, damage their reputation with customers and the market. Therefore, it is not surprising that many Vietnamese businesses incur losses both when agricultural prices decrease and increase!
Although our agriculture and commodity sector is admirable, large-scale production serves no purpose when the internal supply chain and export chain still break deals, causing a domino effect, and ultimately heating up both the domestic and international markets.
Many of our country’s leaders, during diplomatic negotiations with foreign countries, have proposed that partner countries accept Vietnam’s market economy. A market economy not only implies that our country has the capacity to produce and supply large quantities of goods to the world market but also accepts the rules of the market in terms of transactions, payment… and most importantly, is ready to maintain its credibility when entering the market.
Partner countries will inevitably consider such “breaking deals” in the trade of agricultural products through the reports of their professional associations. A certain country may not trust or recognize our market economy concerning its interests or politics, but they would consider such practices in the trade of agricultural products.
Looking inward, today’s breaking of deals in the trade of rice, coffee, etc. shows that the export supply chain of these agricultural products is not sustainable. When the supply chain is not sustainable, there is no hope for sustainable production!
Nguyen Quang Binh