Nov 15 (Reuters) - Two straight years of “massive shortfalls” in global robusta coffee output will create a cumulative supply deficit of 8 million bags that should be reflected in much higher prices, Olam International Ltd’s chief executive officer said on Wednesday.
Sunny Verghese, speaking on a conference call with analysts about the Singapore-based commodity trader’s third-quarter results, forecast a 4 million bag robusta deficit in the 2016/17 marketing year and again in 2017/18.
“So two years in a row we have built up cumulative deficits of eight million bags, and that should reflect in much higher fair values for coffee,” Verghese said.
“The market is not reflecting that as you can see in the market today,” the Olam CEO added.
Olam reported a 17.5 percent rise in its third-quarter net profit, citing strong volume growth and improved operational performance across most of its segments.
However, the company said the third quarter was weak for its coffee business, and this was expected to continue through the fourth quarter, while the cocoa supply chain and trading business faced challenges.
Robusta prices could be poised for a “flare-up” as the market has inverted — when the contracts for nearby delivery are more expensive than deferreds — and differentials in top-grower Vietnam and Indonesia tighten, Verghese said.
In the larger arabica market, however, he forecast a short-term price correction upwards.
“But once the very large estimated 2018/19 arabica crop in Brazil comes to pass, which will be a record high crop, we expect that will have a bearish impact on prices,” he said.
In cocoa, Verghese forecast a global 2016/17 cocoa surplus of 364,000 tonnes and a small surplus in 2017/18.
“However, on the demand side, cocoa grinds have grown by about 5 percent this year, which is significantly above trend line,” Verghese said.
Demand growth for cocoa was expected to be slightly above the trend line after manufacturers extended their cover to around 10-1/2 months, “which is historically some of the highest covers that we have seen,” Verghese said.
This came after around 18 months of hand-to-mouth buying on expectations for lower cocoa prices, which led to the drawdown of stocks and firm combined ratios for products like powder and butter, he said.
Olam aimed to increase its powder capacity by bringing two U.S. facilities onstream and expanding its powder milling capacity in Singapore for the Asian markets. (Reporting by Marcy Nicholson in New York; Editing by Tom Brown)