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Coffee best bet in ags, cocoa rally has further to go

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Coffee represents the best bet in agricultural commodities, while cocoa is "relatively undervalued", the head of one of the world's biggest crop traders said, issuing downbeat estimates for palm oil production too.

Sunny Verghese, the chief executive and founder of Singapore-based Olam International, said that coffee was "significantly undervalued", citing two years of world production deficit which had cut the world stocks-to-use ratio to 30%.

When the stocks-to-use ratio – which, in indicating the availability of a crop, gives an indication of the extent to which buyers will be forced to pay up to secure supplies – has hit these levels previously "we have significantly higher valuations of coffee", Mr Verghese said.

"If you have some money to invest, probably you should invest in coffee.

"I would think that over the next 12 months coffee will be the best performer from a returns point of view."

'Extremely undervalued'

The comments follow an estimate on Thursday by London-based commodities broker Marex Spectron of a 2.8m-bag world coffee production deficit in 2015-16, following on from a 5.2m-bag shortfall last season.

"Producer stocks are simply no longer there, except in Vietnam, and consumer stocks should drawn by 2m-3m bags," Marex said.

Separately on Friday, Vivek Verma, Olam's head of coffee, told a conference in Costa Rica that coffee was "extremely undervalued", pegging the world production deficit this season at 4.8m bags, and last season at 5m bags.

The 2016-17 season should also see an output shortfall, despite the potential for a rebound in Brazilian production to a record 60m-62m bags, with "rising consumption" keeping the market in deficit.

'Major impact'

Mr Verghese said that cocoa was also "undervalued", even as London futures in the bean hit a four-year high in London, lifted by concerns that dry weather had hurt production prospects in West Africa, the main producing region.

Indeed, Mr Verghese said that "we see a major impact on crops" in top producer Ivory Coast and second-ranked Ghana from El Nino, which has a history of causing undue dryness in these countries.

"We were at exceptionally dry conditions even before El Nino took effect in the July to September period," he said, adding that the group's own research on "crop count and stock count… points to a significant shortfall in crop, which would mean that, despite prices being high, it is relatively undervalued.

"We think that there is more upside [to prices] as a result of how the crops are developing in the key producing countries and the potential impact of a strengthening El Nino."

Olam last month completed the $1.2bn acquisition of Archer Daniel's Midland's cocoa processing business – a deal Mr Verghese said had shown perfect timing given that the combined ratio, which measures processing margins, had "revived very dramatically" to 2.4 from 1.7 some three months ago.

Palm oil prospects

Mr Verghese also said that the El Nino had dented output prospects for palm oil, being linked too to dryness in South East Asia, the main producing area for the vegetable oil.

Olam was forecasting a 500,000-tonne drop in palm oil output in Indonesia next year, he said - a performance far worse than expected by the Indonesian Palm Oil Board, which last month cut its estimate for 2016 output to 33m tonnes, a rise of 1.5m tonnes year on year.

For Malaysia, the second-ranked palm oil producing country, 2016 output will fall by 1m tonnes, he said.

However, pricing prospects for palm oil would also depend on the success of programmes such as Indonesia's drive to boost consumption of biodiesel, which is made from vegetable oils, and on the availability of rival oils such as soyoil.

By Agrimoney.com

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