Global coffee prices may surge early next year as tighter bank lending in top robusta producer Vietnam chokes off cash to exporters, cutting supply and pushing up premiums even as the harvest rolls in. London robusta prices could rise by about 10-20 percent, leaving roasters with no choice but to pay up until farmers in Vietnam decide to release stocks and beans from other key coffee growers resurface in the second quarter of 2012.
Robusta from Vietnam is typically offered at hefty discounts to Liffe futures when supply is bountiful during harvests, but prices have flipped over to a premium for the first time in at least a decade during harvest as many cash-strapped exporters have disappeared from the physical market. Vietnam has tightened bank loans this year to slow annual credit growth and combat inflation of more than 18 percent, but the move has cut cash flow to exporters who need money to buy beans from farmers and also raised new fears of defaults.
"When you tighten the purse strings on the exporters, the chances are that prices will rise due to a crackdown on supply," said Jonathan Barrat, managing director of Commodity Broking Services in Sydney. "On a break of $1,840, we can see prices moving above $2,000." London robusta has bounced almost 3 percent since hitting an 11-month low at $1,784 a tonne in November, partly due to limited sales from Vietnam, although the contract is still well below a peak of around $2,670 hit in March.
The contract traded at around $1,830 on December 23, the last day of trading before the holiday period. "If Vietnam does not sell much next month, roasters will have to buy from London markets and prices could then rise to $2,200 a tonne," a trader with a European firm in Ho Chi Minh City said. This forecast implies a 23 percent surge in London prices from the November low.
Many buyers, who had delayed purchasing Vietnamese coffee to take advantage of seasonally typical discounts of more than $100 per tonne as the crop peaks in December, are having to pay premiums of as high as $70 to the London March contract as they fight over freshly-roasted beans for nearby shipments. In December 2010, grade 2, 5 percent black and broken beans, mainly used in instant coffee, were sold at discounts of between $135 and $170.
"Pricing is chaotic this year, and some traders are short of beans because of the premiums to London," said a coffee dealer in Ho Chi Minh City. POLICY PAINS
Vietnam has tightened lending to reduce bad debt, targeting a reduction in credit growth to around 12 percent this year from 27.65 percent in 2010 as it fights soaring inflation. The policy change has hurt domestic trading houses.
Exporters complain they are not able to get bank loans to stockpile coffee from the 2011/12 harvest, which is likely to yield 20.83 million bags in the crop year to September 2012, or about 14 percent of global coffee output. "Banks have not started disbursing funds yet. Banks are very careful now in doing business with coffee companies after many losses in recent years," said a Vietnamese banker.
Banks are reluctant to lend to exporters, who either delayed or defaulted on shipments in the previous crop year as farmers refused to honour earlier contracts after domestic prices climbed and eventually hit a record at 51.9 million dong ($2,468) a tonne in May. While bankers need government approval to grant extra credit to exporters for bean purchase and stockpiling, cash-rich farmers who have gained from a nearly 50 percent rise in domestic coffee prices this year refuse to sell beans at below 40 million dong a tonne.
Vietnam's coffee exports in December fell an estimated 8.5 percent from a year ago to 150,000 tonnes, as farmers held back stocks and exporters struggled to buy beans.
The Vietnam supply squeeze has also affected second-largest robusta producer Indonesia. Indonesia, the world's third largest coffee producer after Brazil and Vietnam, has turned to Vietnamese beans as bad harvests earlier this year cut supply and propelled premiums for grade 4, 80 defect beans to a record $550 in August.
But procuring Vietnamese beans has become difficult as the current price of around 39 million dong per tonne is below the price farmers want, even if it is about 60 percent higher than production Reuters Even though about 80 percent of the crop in Vietnam has been harvested, farmers feel under no pressure to sell. Higher grade Vietnamese robustas imported by Indonesian roasters are now offered at premiums of up to $160 for January shipment, having been sold at $60 premiums in November.
BULLISH FACTORS, DANGER AHEAD? Other factors supporting prices include an estimate by the International Coffee Organisation for a lower global output in this crop year amid steady growth in demand. The ICO has pegged the 2011/12 global coffee output at 128.6 million 60-kg bags, below 133.1 million bags a year ago.
While supply falls, the ICO expects global consumption to rise steadily next year to match the 2.5 percent annual average growth seen in the past decade. More supply problems may lie ahead. Inclement weather in Colombia, the main producer of high-quality arabica beans, could hit production and support prices before fresh supplies from Asia and elsewhere in the Americas enter the market in May.
Still, farmers in Vietnam could be tempted to sell beans before Tet, Vietnam's biggest festival to mark the Lunar New Year that starts on January 23. With the harvest expected to end in mid-January, farmers need cash in the first half of next month to pay wages for the labourers hired for picking cherries. In the end, farmers will have to sell anyway, traders said, adding that once stockpiles are unleashed on the market, prices were likely to fall.
"While withholding their sales, farmers are largely contributing, of course unwillingly, to a (future) bearish trend," said Herve Touraine of SW Commodities. "However, with the bullish short-term prospects, we cannot blame the farmers. If we were in their shoes, we would probably have done the same."
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