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 last 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.