SINGAPORE The global coffee market could find a floor around current levels as multi-year low prices prompt farmers to cut production, commodities trader and coffee supplier Olam International Ltd OLAM.SI said on Monday.
London robustas slid to their lowest since June 2010 on Friday, largely driven by prospects of a record crop in Vietnam, while December arabica futures on ICE Futures U.S. dropped to the lowest in more than four years last week.
"It does not make sense for farmers to fertilize at the same level or (carry out) weeding at the same level, so they will reduce the inputs," Olam Chief Executive Officer Sunny Verghese said in an interview at the Reuters Global Commodities Summit.
"There might be a little bit more downside to coffee prices, but we see that we are reaching the bottom."
The International Coffee Organization has raised its global coffee production estimate to 145.2 million 60-kg bags in the 2012/13 crop year, up 0.5 percent from its previous estimate, as output soared in Brazil and Colombia.
The new forecast for 2012/13, which ended September 30, is up 9.6 percent from 2011/12 and the highest on publicly available records that date back to the 1990/1991 crop year.
Robusta production jumped by 11.6 percent to an estimated 56.4 million bags in 2012/13, with arabica production rising by 8.4 percent to 88.8 million bags, the ICO said in a monthly report.
Olam, which produces and trades several agricultural products, is among the top global suppliers of coffee and cotton.
Bearish fundamentals in the cotton market are likely to put pressure on prices although stockpiling and imports by China, the world's top buyer, could provide some support, Verghese said.
The spot month cotton contract on Friday hit a low of 76.54 cents a lb, its weakest since January.
"We believe it will trade in the range between 70 and 75 cents, so there is a downside to 70 cents. If the Chinese government policy continues the way it is, they will trade around 75-80 cents."
China almost doubled the purchase of domestic cotton for state reserves in the latest week to 608,560 metric tons, boosting its buying after a sluggish start to this year's stockpiling program, official data showed.
The International Cotton Advisory Committee on Friday raised its forecast for global inventories on an improving outlook for this season's crops and higher output in major producers.
SLOWER GROWTH PATH
Olam, a key player in global cocoa trade, is keen to expand its manufacturing and grinding business, Verghese said.
"We don't want to be a major processor, but we will want to be a meaningful processor," he said. "We will do a mix of organic and inorganic investments in the processing side."
Olam shifted to a slower growth path in April, saying it will nearly halve its capital spending over the next three years and trim its businesses, after criticism from short-seller Muddy Waters last November sent the company's stock and bond prices plunging.
Singapore state investor Temasek Holdings TEM.UL raised its stake in Olam from around 16 percent before the Muddy Waters allegations to 24 percent.
Verghese said Olam is on track to be free-cashflow positive in the year to June 2014, one year earlier than previously forecast. He added that the company's debt-to-equity ratio is below two times and the company can maintain this level.
"We regularly are in contact with our investors, they are very pleased with the recalibrated stand and they are waiting to see how we execute," he said.
"But they have to be patient and we have to guide them to be patient because none of the measures that we are taking are short fixes, they will take time to execute."
Follow Reuters Summits on Twitter @Reuters_Summits
(For other news from the Reuters Global Commodities Summit, click here)
(Editing by Muralikumar Anantharaman)