Coffee futures are "poised for a breakout" from the range that has constrained them for most of the past six months, the head of the one of the world's top ag traders said, foreseeing the potential for "much higher" prices.
Sunny Verghese said that the impact of underlying tightness in coffee supplies was being masked in international markets by the weakness in currencies of major producing countries, which cuts the value of beans in the dollar terms they globally traded in.
"Because of the Columbian peso devaluation, the Brazilian real devaluation and devaluation in most of the producing countries' emerging market economies, the fundamental supply/demand scenario is not being fully reflected in US dollar prices," said Mr Verghese, chief executive of Olam International.
However, the tightness of supplies will ultimately feed through to lift values.
"In the short term all the other technical factors can overwhelm the fundamentals, but in the medium term, long term the fundamental will prevail," Mr Verghese told investors.
The impact will be to lift coffee prices which, as measured by New York arabica futures, have proved reluctant to move below 115 cents a pound, but also "also met a lot of resistance at the 125 –cents-a-pound] levels", he said.
Olam - major trader of coffee, as well as other ags – believes that feel that bean prices are "poised for a breakout".
"If the fundamentals play out and there's lower crops in the major producing countries, a fairly stable demand for coffee, a fairly predictable demand for coffee, we would warrant the prices to be much higher than where they are today," Mr Verghese said.
He highlighted the dent to world production prospects from dryness which has depressed prospects for the Brazilian robusta coffee crop, and hopes for arabica output in Colombia.
In Brazil, "recent weather shows, again because of El Nino, a more-than-expected impact on the Brazilian conilon [robusta] crop", Mr Verghese said.
"So we are seeing Brazilian crop revised downwards," he said, quoting the consensus forecast for the country's overall output, including arabica beans, at 55m-56m bags.
"The Colombian crop has been lowered by, what, about 1m bags."
Meanwhile, stocks for delivery against New York futures have "been drawn down quite alarmingly", he said, to stand at 1.55m bags, according to an exchange report on Monday.
At the end of February 2015, they stood at 2.27m bags.
"We expect that will likely decline to about 1.2m bags," Mr Verghese said.
"The last time we have seen that was in 2010 and at that time prices were very, very high, coffee prices."
By Mike Verdin