(Bloomberg) – Palm oil and coffee prices are poised to climb as crops from Asia to Latin America suffer from the strongest El Nino in almost two decades, according to Singapore commodity trader Olam International Ltd.
Palm oil inventories will further shrink in the second quarter as about 1.5 million metric tons to 2 million metric tons of production is lost to El Nino-induced dry weather, Chief Executive Officer Sunny Verghese told reporters in Singapore on Monday. Stockpiles in Malaysia, the largest producer after Indonesia, dropped to a six-month low in January, according to the Malaysian Palm Oil Board.
“El Nino conditions in Malaysia and Indonesia are persisting beyond the first quarter and we expect it will continue in the second quarter,” said Verghese, who runs one of the world’s biggest food trading companies. “We see a significant draw-down in inventories, an additional draw-down in inventories as a result of the lower production.”
Prices of the oil used in cooking and as an alternative fuel surged to a 21-month high this month as El Nino weather conditions curbed yields amid a seasonal drop in output. Coffee prices will rally as certified coffee stockpiles are depleting at an alarming rate, Verghese said. Colombian production may decline by 1 million bags this year, he said.
“We will begin to see pressure on growing supply-demand imbalance, reducing end-stock ratios and declining certified stocks,” Verghese said. “Coffee is poised for a breakout. ”
Olam expects certified coffee stockpiles to decline to about 1.2 million bags of 60 kilograms each from 1.4 million to 1.5 million bags now. “The last time we saw that was in 2010, and at that time coffee prices were very, very high,” Verghese said.
Coffee Breakout
Robusta futures, which surged 62 percent in 2010, have dropped 11 percent this year on ICE Futures Europe in London after a 20 percent plunge last year. Arabica futures have retreated 9.1 percent in New York this year after a 24 percent drop in 2015.
“El Nino is a little bit more severe than we anticipated two quarters ago,” Verghese said. “This will be quite broad-based and widespread with mostly lower production and lower quality — but in some cases higher production for some crops in some regions.”
The weather event will hurt cocoa crops in Cote d’Ivorie, Ghana and Nigeria, while rubber prices may remain weak in the near term, said Verghese.
Olam, which became the world’s third-largest cocoa trader after taking over Archer-Daniels-Midland Co.’s operations last year, grows crops in 26 countries.
