Robusta coffee prices may be poised for a “potential flare-up”, Olam International said, seeing scope for rise in arabica bean values too, but viewing cocoa prices as poised for a “flat-to-bearish” performance.
The robusta market is showing some signals often interpreted as upbeat for prices, with the premium of the spot contract to forward lots growing, typically seen as symptomatic of a relative squeeze on short-term supplies, and “tightening” price differentials, Olam said.
“Indonesian differentials are extremely tight”, Sunny Verghese, chief executive and founder of the Singapore-based ag trader, told investors.
“But across the board in many of the robusta origins, we see very tightening differentials,” he said, noting too the role of harvest delays from rain in “firming up differential prices” in Vietnam, the top robusta grower.
Meanwhile, the market has “gone into a deep inverse situation”, Mr Verghese said, with the premium of London’s November robusta coffee futures contract, for instance, growing above $70 a tonne its premium over the March 2018 contract, from $20 a tonne three months ago.
Yet London futures have, on a spot contract basis, fallen by more than $160 a tonne over the same period.
“So this is a fairly untenable situation where you have an inverse market, where you have tightening differentials but you have terminal prices coming down,” he said.
The dynamics meant that there “could be a potential flare-up in prices”, fuelled by a rash of covering in short positions, an event Mr Verghese deemed “highly likely”.
“We are fairly friendly” to the robusta market, he said, citing too estimates of 4m-bag shortfalls in world production of the bean both last season and in 2017-18.
However, he revealed a more cautious outlook for arabica coffee prices, which are poised from pressure from a 2018 Brazilian harvest of the bean that he saw reaching record levels.
“We think there’ll be a [arabica] price correction upwards, but once the very large estimated 2018-19 arabica crop in Brazil comes to pass… we expect that will have a bearish impact on prices,” he said.
And on cocoa, he said that prices, while “vulnerable” to a short-covering rally, are “likely to be flat-to-bearish from there”.
The outlook reflected expectations of a “very modest surplus” in world cocoa production in 2017-18, after an excess for 2016-17 that he pegged at “about 364,000 tonnes”.
This season, the surplus would be constrained by factors including “fairy strong growth” in demand for beans, rising at a pace “above trend”, as processors continue to exploit elevated processing margins - as typically expressed by the combined ratio of values of cocoa powder and butter compared with those of raw beans.
“We see combined ratios are holding up because there was a lot of stock drawdown in products over the course of the last 18 months because people, anticipating lower prices… operated more hand to mouth”, slowing inventories of cocoa butter and powder to dwindle.
The comments followed the release by Olam of results showing a 17.5% rise to Sing$24.1m in earnings, after minority interests, in the July-to-September quarter, on revenues up 42% at Sing$6.72bn.
In the confectionery and beverage division, which includes cocoa and coffee, earnings before interest, tax, depreciation and amortisation (ebitda), actually fell by 9.7% to Sing$62.0m, undermined by “difficult trading conditions” prompted by the fall in robusta coffee prices.
However, the edible nuts and spices division reported a 30% jump to Sing$84.3m in etbida, backed by a “stronger contribution” from almonds, cashew, peanuts and sesame operations.
Ebitda from industrial raw materials near-tripled to Sing$32.6m, backed by higher cotton sales.
Olam shares closed down 2.2% at Sing$2.23 in Singapore.