Vietnam Coffee Trade Slows as Buyers Bet on Bigger Discounts

(Bloomberg) -- Coffee trading is slowing in Vietnam, the top robusta producer, on expectations that a larger harvest and changes to the London futures contract next year will give buyers bigger discounts.

Roasters and traders are delaying purchases on bets that a bigger crop currently being gathered will push prices lower, according to traders attending the Asia International Coffee Conference in Ho Chi Minh City last week. At the same time, changes to ICE Futures Europe’s robusta contract next July are expected to widen the discount of Vietnamese beans versus futures.

“It makes sense for them to defer purchases and go as hand to mouth as possible, especially if there’s confidence there’s ample supply," Judy Ganes-Chase, president of J. Ganes Consulting LLC, said in an interview last week.

Vietnam’s robusta crop will probably rise 16 percent to 28.8 million bags in the season that started in October as output rebounds after rains hurt last year’s harvest, Export Trading Group estimates. The recovery comes as more output in Brazil next year is expected to add to supplies and help switch the global market into a surplus, Eric Llull, a coffee research manager at the company in Geneva, Switzerland, said at the conference.

The market is also bracing for changes on the London bourse. New rules mean traders bringing coffee from producing countries to ICE stockpiles will have to pay for the loading out of beans from warehouses as well as rent until the end of the delivery period. The higher costs are likely to feed through to futures, with a wider spread between July and earlier-dated contracts.

Spreads are already being impacted, with the May contract’s discount to July futures widening about 43 percent in the past three weeks. The rule changes should also lead to bigger discounts in the physical market for Vietnamese beans compared with bourse prices.

"Who has to pay for this extra cost? The trader who wishes to deliver to the exchange," said Stephan Loots, manager of the coffee and cocoa department of trader Group Sopex in Antwerp, Belgium. "That’s an extra cost, which means traders will have to buy cheaper at origin."

As traders try to work out what are fair values for spreads and physical discounts, some roasters are looking to benefit by locking in futures prices and postponing physical bean purchases from Vietnam until later -- when discounts might be more attractive.

Stockpile Impact

For traders, higher costs may mean they won’t earn as much from carrying -- a strategy where beans are bought and stored before being sold later for a profit. That will potentially lead to a plunge in stockpiles backing futures contracts and leaving the market at risk of a “permanent squeeze,” Loots said.

Some traders at last week’s conference were concerned about the risk of falling inventories. Others said that prices of earlier-dated futures would at some point have to rise to attract supplies into warehouses if beans are needed in consuming nations. Bigger discounts may not emerge if some warehouses cover part of the loading-out costs to retain business.

Robusta and arabica-coffee futures have been among this year’s worst-performing major commodities tracked by Bloomberg. Global coffee supplies are forecast to exceed demand by 5.5 million bags in 2018-19, reversing a 3.1-million bag shortage this season, ETG forecasts.

Read more: Coffee glut hinges on whether top growers will hold back sales

Higher-quality beans arriving from Vietnam are also a relief for roasters, who struggled to secure good-quality supplies last season. As the weather turned drier, especially in the southern part of Vietnam’s coffee belt, Rabobank International is now expecting "a speedy harvest," it said in a report this week, forecasting a total crop of 28.7 million bags.

Roasters are “in no rush to buy,” Nguyen Chi Cuong, chief executive officer at trader NC Group Ltd., said in an interview in Ho Chi Minh City. “Supply from next year’s crop in Brazil will be good and also from Vietnam, so they can decide later.”

©2017 Bloomberg L.P.

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