Olam

Olam: Global coffee supplies fall, offering much needed support

Global coffee supplies are falling short of demand, a remarkable feat in an economic environment where over supply is often touted as a reason for falling prices.

According to Olam, the global supply of coffee will continue to fall as consumers erode stockpiles and new buyers enter the market before the next crop is harvested in Brazil, the world’s largest producer of coffee beans.

Coffee bean prices have fallen by about 23% since the start of the year with speculators betting on lower prices since Mar.

According to the US Commodity Futures Trading Commission, money managers are in a net short position of 29,040 lots in the most recent week.

The bearish bets were made mainly due to the decline in the Brazilian Real boosting the appeal of exports from the country. However, with most of the bearish factors already factored in, new buyers, including coffee bean roasters could start to up the buying ante.

Supply has also fallen short of demand for the past two years, with another shortage expected in 2016. Olam has forecasted that the cumulative deficit from this supply shortage could hit almost 10m bags.

ICE Futures US notes that inventories at its warehouses have fallen to 1.985m bags at the end of Sep, the lowest since 2012.

Still, a record crop harvest from Brazil could help ease the global supply tightness when the beans enter the market in Aug ’16, although it would be difficult to offset the entire supply deficit.

According to Olam’s 1H15 financial report, food staples and packaged foods, which includes coffee beans and other soft commodities, accounted for 21.6% of its total EBITDA, and declined 14.9% y/y in absolute terms.

Olam currently trades at 14.5x forward P/E and 1.2x P/B. The street is neutral on the counter with a consensus TP of $2.14 on 4 Buy, 6 Hold, and 1 Sell ratings implying a potential upside of 6.5%.