FEB 2015 (GCR Magazine)–A look at why such wide-ranging reports are coming out of the world’s second biggest producer, and where the market and production is heading.
With 50 – 60 per cent of Vietnam’s 2014-15 (October to September coffee year) harvest expected to be complete by mid-December, debate continues about the size of the crop. However, this is likely to be the case right to the end of the coffee year, and beyond, as was the case in 2013-14 and in preceding years.
Historically, Vietnamese coffee stocks have been low and stable, meaning that the flow of exports plus annual domestic consumption has been a good barometer of production. At the end of the 2013-14 coffee season, however, reports were that stocks had risen in Vietnam.
Ho Chi Minh-based traders say that ending stocks in Vietnam had been stable at around 60,000 tonnes (1 million 60-kilogram bags) in previous seasons, but that at the end of 2013-14 the volume had jumped to over 120,000 tonnes (2 million bags). As reported by various news organisations in the last couple of weeks, some international trade houses are reporting the volume as high as 240,000 tonnes (4 million bags).
The build in stocks has been attributed to Vietnamese sellers withholding crop in the last few months of the 2013-14 coffee year, amid reports of lower output in Indonesia and given expectations of a global coffee price increase due to the adverse weather conditions in Brazil.
It is now the case that Vietnamese carryover stocks are subject to vastly different opinion, with a wide variation of estimates confined solely to production until now. And that variation in production figures has grown in the past few years.
Looking at the most recently ended coffee season, some sources had put Vietnam’s 2013-14 crop at around 26 million bags, but the General Statistics Office (GSO), the official data reporting agency in Vietnam, export data belies such an output level.
CoffeeNetwork has maintained its estimate of 2013-14 output at a record 29.5 million bags, possibly easing to 29 million bags in 2014-15. Official forecasts in the last couple of weeks put the crop down towards 20 million bags in 2014-15.
At the recent Coffee Outlook conference in Ho Chi Minh City, Vietnam’s 2014-15 crop was reported 40 per cent down on the year by the Vietnam Coffee and Cocoa Association (VICOFA), say local trade sources. The association had previously forecast 2014-15 output at 25 million bags, down from around the generally accepted near-30 million bags produced in 2013-14.
VICOFA attributes the drop to poor irrigation levels and less than favourable weather conditions. Note that the reports came on the heels of Vietnam’s Agriculture Ministry putting 2014-15 production at just 21.67 million bags. However, the ministry sees 2013-14 output at 21.5 million bags, meaning a slight increase year-on-year in 2014-15. Note that export data for 2013-14 suggests it was impossible that 2013-14 output was below 29 million bags.
Such low numbers are often treated with scepticism, as official forecasts have historically tended to be extremely low at the start of the Vietnamese coffee season. However, this year the range of estimates for Vietnam is larger than it has been before. The latest official comments on 2014-15 Vietnamese output mean that the crop is effectively seen in a 10 million bags range, from around 20 million bags up to 30 million bags.
In previous years it has been a 5 million bags range for Vietnam, with the 10 million bags difference confined to Brazilian production forecasts.
The chart on page 29 shows that the divergence in official estimates from the United States Department of Agriculture’s (USDA) estimates has grown in the past few years, a factor that can be attributed to there being more room to “play with” now that the annual crop is larger than ever. The chart also shows that ICO and VICOFA data is similar – the International Coffee Organization (ICO) reports the figures submitted to it by member countries, and Vietnam is an ICO member.
Such immense differences in opinion of Vietnamese output come at a time when uncertainty abounds about Brazilian production, all of which is likely to mean sporadic market volatility.
Export data has also highlighted differences of opinion. Looking at the ICO’s report for September, and therefore the full 2013-14 October to September coffee year, a wide range is seen.
The ICO data showed a 33 per cent jump in Vietnam’s September exports to 1.6 million bags from 1.2 million bags a year earlier. Also, it showed a 10.7 per cent rise year-on-year in Vietnam’s full year 2013-14 export total.
However, the ICO reported volume for the coffee year was only 23.7 million bags, whereas GSO data pinned coffee year exports at 27.1 million bags. Naturally, Vietnam can’t be exporting more coffee than it produces, especially factoring in the country’s strong levels of domestic consumption.
The average export price of Vietnam’s Robusta coffee in 2013-14 was US$1858 per tonne (FOB Ho Chi Minh City). This compares with US$1919 per tonne in 2012-13, $1984 per tonne in 2011-12 and just over $2000 per tonne in 2010-11.
While the average export price has been easing in the past few years, the average price remains at the highest levels recorded historically. Note that since the 1990-91 coffee year, the 2010-11 average export price of over US$2000 per tonne has been the highest price recorded apart from the record US$2700 per tonne in 1994-95.
Vietnam’s average domestic price as reported by the GSO was 37,000 dong (US$1.73) per kilogram in key growing state Dac Lac in the 2013-14 coffee year. In 2008-09 the average price was 25,000 dong (US$1.17) per kilogram. In 2010-11 the average price was 43,000 dong (US$2.00) per kilogram.
Traders expect a similar average price in 2014-15 to the 37,000 dong per kilogram price in 2013-14.
Throughout Vietnam’s relatively short history as a major coffee producing country, growers have managed to record decent profits even in times of price erosion. This is due to relatively low production costs, which remains profitable even though costs have been rising.
Current production costs are estimated at 27,000 dong (US$1.26) per kilogram. Note that five years ago an average 17,000 dong (US$0.80) per kilogram was estimated for average production costs. An increase has been seen due to higher fuel costs, wages, and the devaluation of the Vietnamese dong.
There was massive economic growth in Vietnam from 2000 – 2007, but the global financial crisis in late 2008 had a notable impact on the already weakening Vietnamese economy, brought about by trade deficit and inflation. With the aim of reducing the trade deficit and tackling inflation, Vietnam began a series of devaluations of its currency in the hope of boosting exports and reducing the trade deficit.
Economic factors will continue to play a part in Vietnam’s coffee sector, as growers and sellers will continue to seek ways in which to maximise revenue and cushion themselves against the downside in a volatile market. There is no doubt that having burst onto the world coffee stage in the late 1990s, by the end of the 2000s the Vietnamese had become market savvy and aware of the influence that national production levels could have on world Robusta prices.
In the late 1990s the Vietnamese would have sold heavily ahead of the annual Tet holidays, but within a short space of time they realised the downwards pressure they exerted on global values, and for years now there has been a very regulated flow of sales in the run up to Tet. In 2015 Tet falls mid-February and a pick up in selling and exports will be seen early 2015, but not in substantial volumes.
Only once bulk monthly shipments can be assessed, usually in the January to May period, are there likely to be any concrete revisions of 2014-15 production figures. Until then the market will be subject to wide-ranging estimates.
What is clear, however, is that in view of continued strong world Robusta consumption growth, Vietnam needs to be producing levels of 30 million bags as opposed to the 20 million bags a few years ago. GCR