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Olam warns of El Nino threat to Vietnam coffee output

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Olam International cautioned over a dent from the nascent El Nino to coffee production in Vietnam, where a veteran analyst cautioned over a "100-year drought in the making".

A Shekhar, the Olam International finance director, said that the Singapore-based agricultural trader was "watching like a hawk" the development of the El Nino weather pattern, which official Australian and Japanese meteorologists said last week had returned for the first time in five years.

El Ninos have a history of causing weather anomalies, and yield effects – both negative and positive – in a range of countries.

The El Nino threatened "broadly two kinds of impacts" – the first, dryness in eastern Australia, a major cotton-, sugar- and grain-growing region, and the second in the South East Asian coffee belt.

'Baking in heat'

"In parts of Indonesia and Vietnam, for example, where we do coffee, we would expect decline in production and lower rainfall," Mr Shekhar said.

The comments come as much of Vietnam, the top robusta coffee-producing country, is already grappling with dryness, making crucial a generous rainy season, which should start imminently in the key Central Highlands coffee regions, and last to the late-year harvest period.

Judith Ganes-Chase, the veteran soft commodities analyst, said that "Vietnam has been baking in heat with a [once in a] 100-year drought in the making and vegetative growth showing extreme stress over the coffee belt".

"Judicious use of irrigation has so far prevented extreme losses to the crop," said Ms Ganes-Chase, at J Ganes Consulting.

"But with water levels now running low, a continuation of this pattern and delayed onset of the rainy season certainly runs a risk of the crop not meeting its potential."

'More severe'

Ms Ganes-Chase said that last year, which was also dry, saw "production fall modestly".

However, "the conditions this year are more severe".

Forecasts for the crop are mixed. Coffee house Volcafe in March forecast Vietnamese output recovering strongly in 2015-16, by 3.2m bags to 30.6m bags, after falling 2.6m bags in 2014-15.

But Vietnam's Vicofa coffee and cocoa association has forecast output next season dropping to 22.2m bags.

A forecast in the official Tuoi Tre newspaper on Monday offered hope for a more upbeat result, saying that rains should come to the Central Highlands this week.

'Fund activity'

Mr Shekhar also sided with observers such as Brazil's Conselho Nacional do Café producers' group in seeing speculative selling, rather than supply and demand factors, as driving the recent decline in coffee prices.

The decline, which appeared "overdone", was "not so much because [of] the demand/supply factor that we see, but because of fund activity in the marketplace", he said.

The drop had "caused some amount of uncertainty and illiquidity" in the coffee market, he added.

US regulatory data on Friday showed managed money, a proxy for speculators, raising their net short in New York arabica coffee futures and options to a 17-month high of 10,077 contracts as of Tuesday last week.


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