Armajaro’s Ward Bets on Coffee as El Nino Curbs Vietnam Output

  • Vietnam’s coffee production to fall 20% next season, Ward says
  • Dry weather in Brazil is threatening country’s robusta crop

Anthony Ward, co-founder of the $500 million hedge-fund firm Armajaro Asset Management LLP, is bullish on coffee as production drops in Vietnam and dryness threatens crops in Brazil.

Output in Vietnam, the world’s top producer of the robusta type, will fall 20 percent in the season starting next month, said Ward, whose CC+ Fund focuses on coffee and cocoa. The strongest El Nino in almost two decades has curbed production in Vietnam at a time when Brazil is suffering another dry spell that risks cutting the nation’s robusta crop for a third year.

Robusta coffee is near a 19-month high in London and money managers are the most bullish in four years. Global supplies of the bean type used in instant coffee are set to fall short of demand by 6 million bags in the 2016-17 season, according to broker Marex Spectron Group. The shortfall will almost all be compensated by an oversupply of arabica, the kind favored by Starbucks Corp.

"The coffee market looks interesting for the first time in a while," Ward said last week in an interview at the European Cocoa Forum in Dubrovnik, Croatia. "Robusta is where the story is."

Dryness during crop development hurt beans due to be harvested next season. Vietnam’s coffee output may drop to 22 million to 23 million bags next season, said Ward, whose CC+ Fund can use as much as a quarter of its capital to trade other agricultural commodities. He didn’t disclose his positioning.

Production Estimates

The forecast production is at least 16 percent less than the U.S. Department of Agriculture expects and would be the lowest in six years. It’s also less than 24.5 million bags Marex Spectron predicted last month. A bag of coffee weighs 60 kilograms (132 pounds).

In Brazil, a drought that cut the nation’s robusta harvest to 11.5 million bags this year forced roasters to buy more arabica, supporting futures in New York, Ward said. Dry weather now is threatening the development of next year’s crop. The London-based fund expects 2017 production below average, at 9 million to 14 million bags.

The country, the top grower of coffee in general, will gather 45 million bags of arabica this year, ensuring supplies are ample, Armajaro predicts. That would be a record, USDA data show. Still, Brazil may need to produce a combined total of at least 55 million bags of coffee next year to avoid a supply crunch, Ward said.

"With problems in Vietnam, Brazil has to have a good arabica crop" to ensure enough supply, he said. Even a loss of about 5 percent from Brazil’s crop would be a problem, he said.

Global coffee demand will climb at an above-average rate of 3 percent next season, Ward said. More people drinking coffee has made up for the drop in consumption caused by the popularity of single-serve machines, such as those made by Keurig or Nestle SA’s Nespresso. The capsules lead to less waste than filter coffee.

Roasters may soon need to boost robusta purchases after letting holdings drop this year. The long position among producers or merchants on ICE Futures Europe is near the lowest since the bourse started publishing the data in 2011.

It looks like "roasters have forgotten to buy robusta," Ward said. “It makes them vulnerable,” because they could be forced to buy at higher prices if the market rallies, he said.

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