Coffee Reserves Seen at Record as Vietnam Farmers Curb Sales

Bloomberg News  Mar 17, 2014

Coffee growers in Vietnam, the biggest producer of robusta beans used by Nestle SA, are holding record stockpiles as they curb sales amid speculation that drought will reduce next year’s harvest. Futures fell.

Inventories reached 850,000 metric tons in the week ended March 7, the highest ever at this time of the year, according to the median of eight trader and shipper estimates compiled by Bloomberg. Growers have sold 50 percent of the record 1.7 million-ton output in the year started October, compared with an average 60 percent in the past five years, the survey shows.

Coffee jumped this year as sales slowed from Vietnam and drought parched crops in Brazil, the second-biggest producer of robusta and the top grower of the more expensive arabica variety favored by Starbucks Corp. While robusta climbed 27 percent, its discount to arabica widened threefold to the highest in two years. That fueled speculation roasters may boost purchases of the cheaper variety, said ABN Amro Clearing Bank NV.

“It seems that prices will keep rising, so I’m holding back sales for now,” said Bui Van Duan, a 40-year-old farmer in Dak Lak province, which represents about 30 percent of Vietnam’s harvest. “We have savings, so I don’t need to rush.”

Robusta fell 1.5 percent to $2,143 a ton in London today. Arabica in New York was at $1.96 a pound, rebounding 77 percent in 2014 after three years of losses to become the top performer in the Standard & Poor’s GSCI gauge of 24 raw materials.

Brazil Drought

Dry weather in Brazil has raised concern global supplies will trail demand. The shortage of arabica beans will be 5.3 million bags in 2014-2015, while the deficit for robusta will be 1.2 million bags, estimates Volcafe Ltd., the Winterthur, Switzerland-based unit of commodities trader ED&F Man Holdings Ltd. A bag weighs 60 kilograms or 132 pounds.

In Vietnam, the decline in robusta prices in 2013 prompted farmers to curb sales. Growers had probably sold 33 percent of their beans before the Tet Lunar New Year Holidays in January, compared with an average 43 percent in the past five years, a survey published that month showed.

Farmers in Vietnam “think higher prices are coming,” Sterling Smith, a futures specialist at Citigroup Inc., in a March 11 e-mail in response to questions from Bloomberg.

Robusta’s discount to arabica touched $1.087 on March 5, the widest since March 2012. In 2011, it was $1.89 a pound, the highest since at least 2008. While demand for robusta jumped 15 percent in 2011-2012, usage of arabica from Brazil slid 12 percent, according to Volcafe.

Roaster Switch

“Substitution conversations have picked up, but are difficult to quantify just right now,” ABN Amro said in an e-mailed report this month. “If we have an extended period of time where the arb holds at these kind of levels there will be a switch. The problem as always for the larger roasters is being able to respond in a reasonably timely manner, if at all.”

Vietnam exported 303,000 tons in the first two months, 6.4 percent less than a year earlier, the General Statistics Office estimates. The country will ship 25.1 million bags from a record crop of 28.5 million bags in 2013-2014, according to the U.S. Department of Agriculture. Reserves will total 3.82 million bags by Sept. 30, the USDA says.

“At current market levels, I would expect more sales of robusta from Vietnam unless local market conditions dictate otherwise,” Abah Ofon, a Singapore-based director of agricultural commodities research at Standard Chartered Plc, said in a March 11 e-mail, in response to Bloomberg questions.

Drought Threat

Beans in Dak Lak traded at 41,600 dong ($1.97) a kilogram on March 13, Trade & Tourism Center data show. While prices increased 41 percent from a three-year low of 29,600 dong in November, they’re still below 45,500 dong reached in March 2013, which was the highest level in almost 18 months.

Gains in robusta futures have trailed those of arabica because of Vietnam’s increasing stockpile, said Smith of Citigroup. A dry spell in the Central Highlands region, which includes Dak Lak province, may change that, he said.

“Dry conditions are being seen in some growing areas,” Smith said in a report dated March 11. “While it is not yet a problem, it is a situation that does merit further monitoring.”

Drought and “coffee flu” in the Central Highlands and frost in Son La province will cause coffee production in 2014-2015 to decrease “significantly” from a year earlier, Vietnam Coffee and Cocoa Association, or Vicofa, said March 6, without giving specific output figures.

Dak Lak will have dry and sunny weather in the 10 days ending March 20, the province’s Meteorology and Hydrology Department said March 11. No rain was recorded from March 1 to March 10 at 10 stations, which includes one in neighboring province of Dak Nong, it said. Volcafe said last week it was “too early” to be concerned about the country’s dry weather and farmers were hoping for prices to reach 45,000 dong.

“I don’t need money yet so I’m going to wait until prices hit 45,000 dong,” said Tran Thanh Nga, a 31-year-old farmer who hasn’t sold any beans from her 4-ton stockpile. Her warehouse has capacity to store as much as 10 tons, Nga said.