Olam sees higher coffee prices, reports 18% rise in Q3 net profit

Long black faces may be in store for coffee lovers: A shortfall in the robusta market and a possible La Nina occurrence could give coffee prices a shot in the arm, says Olam International, one of the largest coffee traders globally.

Its chief executive Sunny Verghese told this to a results briefing on Wednesday as the commodities trader reported a 17.5 per cent growth in third quarter net profit on higher sales volume and improved operational performance.

The group's net profit came in at S$24.1 million in the quarter, up from S$20.5 million a year ago.

Revenue grew 41.7 per cent to S$6.71 billion from the preceding year, as its traded volume almost doubled to 5.8 million tonnes from 3.8 million tonnes.

Olam generated a free cash flow to firm of S$1.11 billion in the first nine months of this year, versus a negative S$150.5 million in the same period last year, thanks in large part to working capital optimisation measures, lower commodity prices and a lighter quarter seasonally.

Except for the confectionary and beverage ingredients segment as well as the commodity financial services division, earnings grew across most segments.

In the confectionary and beverage ingredients segment, the group faced tougher trading conditions for coffee in the third quarter, and experienced headwinds and margin pressures for both the supply chain and products trading businesses for cocoa though the cocoa processing business did well.

It expects these headwinds for both cocoa and coffee to continue into the fourth quarter.

Asked for his outlook on coffee prices, Mr Verghese said that robusta coffee prices are currently not reflecting the "massive shortfalls" in supply that will be seen in the current crop season as well as the next one.

The firm is expecting a shortage of 4 million bags in each season, resulting in an accumulated deficit of 8 million bags. "That should result in much higher fair value for robusta coffee," he said.

The International Coffee Organisation in August had forecast a global deficit of 1.2 million bags for the 2016-2017 crop season.

Mr Verghese added that there is also a record high short position in the robusta futures market which is weighing down on prices, and hence prices could spike when these are covered.

At the same time, a possible La Nina would also bring about drier conditions to Brazil, the largest coffee producer in the world with both robusta and arabica output, he said.

Olam is also expecting a short term rally in arabica coffee prices, but anticipates that a bumper crop in Brazil in the 2018-2019 season will have a bearish impact on prices in the medium to long term.

Shares in the counter traded at S$2.23 at 4.02pm on Wednesday, down 5 cents or 2.2 per cent from its previous close.