Olam sees shrinking coffee supplies before Brazil's next harvest

BRASILIA (BLOOMBERG) - The global supply of coffee will shrink before the next crop in Brazil, the world's largest producer, as consumers erode stockpiles and new buyers enter the market, according to food trader Olam International Ltd.

Two years of shortages mean global inventories will keep falling for at least the next six months, said Rajat Kumar, a vice president of coffee trading and Dwayne Schmidt, a senior trader at Olam. Index funds will return to the market as buyers in January and declining stockpiles may lead some traders to close bets on lower prices, Mr Schmidt said.

Coffee prices fell 23 per cent this year and data from the U.S. Commodity Futures Trading Commission show speculators have been betting on lower prices in almost every week since March as a decline in Brazil's currency boosted the appeal of exports. Mr Schmidt said recently the main buyers have only been roasters.

"There's certainly evidence that all of the most bearish factors have been factored into the market," Mr Schmidt said Friday in an interview in Basel, Switzerland. "We do see a situation in which there will be new buyers. Recently it has only been the roasters that have been buying."

Global coffee supplies fell short of demand last season and another shortage is expected in 2015-16, Olam said, forecasting the cumulative deficit at almost 10 million bags. Inventories in warehouses monitored by ICE Futures U.S. fell to 1.985 million bags earlier this month, the lowest since 2012, according to exchange data compiled by Bloomberg.

Money managers have gone from holding a net-long position, which represent bets on higher prices, of 15,287 contracts at the beginning of the year to a net-short of 29,040 lots in the latest week, CFTC data show.

Supplies from the new crop in Brazil will help ease the global tightness when the beans enter the market around August 2016, according to Olam. Farmers will probably gather a record crop for the robusta and arabica varieties as the flowering before next year's harvest was "excellent," according to Kumar and Schmidt.

Flowers develop into the cherries containing the coffee beans. Arabica coffee is the kind favored for specialty drinks such as those by Starbucks Corp., while robusta is used in instant coffee and espresso.

Alleviate Stress "We've had two years of consecutive deficits totaling close to 10 million bags, but if everything goes well, then the next record Brazil crop could alleviate the stress," Mr Kumar said, adding that the additional supplies won't be enough to offset entire deficit.

Coffee trading is currently correlated to currencies and it would take a big event, such as unfavourable weather, or stabilization of the Brazilian real to break that pattern, Kumar said.

"The next big thing will be something that surprises, the rains don't start in Indonesia, the rains stop in Brazil, the rains don't come in Colombia," Mr Schmidt said. "These are all very important areas of production where there are question marks. In all these areas, the most optimistic scenario have been factored in."