cocoa futures brokers

cocoa futures brokers

February 16th, 2015

Arabica coffee futures will rebound, spurred by a market squeeze last seen when prices hit 300 cents a pound, with cocoa futures poised to gain on a fall in stocks to “fairly precarious levels”, Olam International boss Sunny Verghese said.

Mr Verghese, the Olam chief executive and founder, and one of the best-known figures in soft commodities, said that the Singapore-based trading house had cut by 2m bags to 49m bags its forecast for Brazil’s coffee production this year.

The forecast for the world’s biggest coffee harvest, which has been hurt by extended dryness over the past year, remains higher than that from many other commentators, such as Conab, the official Brazilian crop bureau, which has pegged domestic output at 44.1m-46.6m bags.

However, Mr Verghese said that a 49m-bag estimate translated into a world arabica production deficit “this year of 4m-5m bags, and next year of 5m-6m bags.

In robusta coffee – as traded in London, and which accounts for the minority of the Brazilian crop – the deficit “will be about 3m-4m bags”, he said.

‘Very friendly to the coffee market’

The production shortfall will, on Olam’s estimates, reduce by some 7-8 points coffee’s stocks-to-use ratio – a key pricing metric, with the availability of supplies seen as an indication of how much buyers will have to pay up to secure them.

This reduction in the stocks-to-use ratio, to a forecast 28%, “is a clear trigger for which way coffee prices are headed”, Mr Verghese said, citing it as a reason for the reluctance of New York-traded arabica coffee futures to retreat below 160 cents a pound, despite rains which have eased concerns over dryness in Brazil’s coffee belt.

“It made, I think, about 20 attempts in the last 30 trading sessions and it didn’t pierce that level.

“As the market begins to realise the tightness, we will be seeing coffee prices rally further,” he added, noting that prices were at some 300 cents a pound the last time the stocks-to-use ratio stood at 28%.

“We feel that coffee prices will continue to firm and we are very friendly to the coffee market,” he said, also noting potential support from the closure by hedge funds of short positions in arabica coffee, which as of last Tuesday had topped 21,000 for the first time in a year.

‘Cocoa prices to gain’

For cocoa too, “the market is priced to go even further higher”, Mr Verghese said, even after a 10% rebound already this month in New York from one-year lows reached after data showing declines in cocoa grinding volumes in Asia, western Europe and North America in the October-to-December quarter.

The data gave an unrealistically downbeat picture of cocoa demand – in following an “above trend” July-to-September period for volumes, which had allowed a stock build, and in not taking account of volumes in West Africa where processors, including Olam, have expanded capacity.

“If you net off that, then the decline in grindings was about minus 4% instead of the minus 9% that was reported.”

‘Fairly precarious levels’

Furthermore, West Africa, the main cocoa-producing region, faced “one of its worst” Harmattan winds since Olam has been operating in the region, leaving Ghana facing a 200,000-tonne drop to about 750,000-760,000 tonnes in output this season.

The Harmattan is a dry wind which blows into West Africa from the Sahara and, when severe, has a history of depressing cocoa output.

Olam was forecasting a world cocoa production deficit this year “of 120,000 tonnes, which means again we will see [stocks-to-use] ratios going into fairly precarious levels”, Mr Verghese said, an estimate unchanged from that made last year.

The International Cocoa Organization has also pencilled in an, unspecified, deficit for 2014-15, as has Commodities Risk Analysis, while JSG Commodities has forecast a surplus of up to 50,000 tonnes.

Large operator

The comments followed Olam’s release on Friday of a 12.0% decline to Sing$118.7m in earnings for the October-to-December quarter.

Olam is one of the world’s biggest cocoa processors, with a global market share set to rise to 16% once it complete the $1.3bn purchase of Archer Daniels Midland’s operations in the sector, announced in December.

In coffee, it has origination operations in all the main African, Asian and South American coffee producers.

- Agrimoney