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MarketScreener Homepage  >  Equities  >  Singapore Stock Exchange  >  Olam International Limited    O32   SG1Q75923504

OLAM INTERNATIONAL LIMITED

(O32)
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Brazil swamps ICE coffee exchange, putting squeeze on small producers

11/09/2020 | 10:03am EST

* Brazil coffee in ICE warehouses surging for first time

* Long-term trend underway that could weigh on prices

* Small farmers could be pushed out market for good

LONDON/NEW YORK, Nov 9 (Reuters) - Brazil is tightening its grip on the global arabica coffee market as its beans surge into ICE Futures exchange warehouses for the first time, a move that could squeeze small producers out of the market and put pressure on benchmark prices.

The world's top grower has long been able to supply large volumes of affordable coffee for the mass market as mechanized harvesting and cheaper processing methods keep its production costs below those of its rivals.

As its total coffee production rises, Brazil is boosting output of higher quality arabica and now, for the first time, is sending its excess beans to the New York futures market in significant volumes.

Data shows Brazilian coffee held in ICE warehouses and available for delivery against futures contracts has soared to 88,294 bags from 650 bags on Sept. 3, helping boost total stocks from recent 20-year lows of 1.1 million bags. <KC-TOT-TOT>.

The move poses a threat to rivals, mostly in South and Central America, as it could weigh further on benchmark ICE arabica futures, which fell to almost 14-year lows in 2019 and remain below many small growers' production costs.

ICE futures generally fall when the volume of stocks that back them rises, while the potential for futures traders to receive Brazilian coffee - less sought after than Central American beans - could also drive them down.

The Brazilian influx so far is probably just the tip of the iceberg.

Traders expect up to 400,000 bags will be delivered in the coming months, the first major arrival since ICE amended its rules in 2013 to allow premium Brazilian "semi-washed" coffee to be delivered against its high-end "washed" arabica futures.

In future years, even more could be delivered.

Washed coffee, which involves the fruit being stripped away using water before the beans are dried, costs more to produce and commands higher prices.

Brazil produces mostly lower quality "naturals" where the cherries are dried before the bean is extracted, but a high quality coffee crop overall this year has allowed it to increase output of "semi-washed" beans, a process with fewer steps than fully washed but which still produces good quality coffee.

"If current market conditions were to arise again Brazil semis would (be delivered) again," said Vivek Verma, CEO of Olam Coffee, part of Olam, one of the world's largest agri-commodities traders.

"Some washed producers would have to move out of coffee altogether, which would be a tragedy," he added.

DOMINANT FORCE

Honduras remains the main source of ICE exchange stocks with 856,425 bags. But that total has dropped by almost half from 1.52 million bags a year ago.

"The low coffee prices we've had mean farmers (outside Brazil) don't want to harvest their coffee anymore, they don't bother picking it, so we can't replace the certified stocks," said a coffee trader at a global commodities trade house.

Dealers believe Brazil produced 6 to 10 million bags of semi-washed coffee this year, roughly double the amount it usually produces.

The production surge has driven down the price of Brazilian semis in the physical markets, which has meant delivering beans to the exchange has become an attractive option.

This may not be the case every year but many believe a long-term shift is underway.

"Brazilian semis are the future potentially, they could become the dominant force of this market," the trader added.

A second trader said: "It would be quite a game changer. People might invest in more washing capacity in Brazil and other arabica origins will become a niche, premium, gourmet product ... it will take about three years for that to pan out."

(Reporting by Maytaal Angel and Marcelo Teixeira. Editing by Nigel Hunt, Veronica Brown and David Evans)


© Reuters 2020
Stocks mentioned in the article
ChangeLast1st jan.
EURO / BRAZILIAN REAL (EUR/BRL) 0.02% 6.5118 Delayed Quote.4.86%
OLAM INTERNATIONAL LIMITED 0.60% 1.67 End-of-day quote.9.15%
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Financials
Sales 2020 - - -
Net income 2020 - - -
Net Debt 2020 - - -
P/E ratio 2020 10,3x
Yield 2020 4,46%
Capitalization 5 369 M 4 053 M 4 053 M
Capi. / Sales 2020 -
Capi. / Sales 2021 -
Nbr of Employees 41 172
Free-Float 69,0%
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Mean consensus SELL
Number of Analysts 1
Average target price 1,23 SGD
Last Close Price 1,68 SGD
Spread / Highest target -26,8%
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NameTitle
Sunny George Verghese Group Chief Executive Officer & Executive Director
Ah Doo Lim Non-Executive Chairman
Neelamani Muthukumar Group Chief Financial Officer & Managing Director
Shekhar Anantharaman Executive Director & CEO-Olam Food Ingredients
Sanjiv Misra Independent Non-Executive Director
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