Firming prices may sink Vietnam’s robusta shipments despite Fed rate hike

Vietnam’s coffee prices have risen 11 percent so far in the 2016/2017 crop year.

Firming domestic market prices may disrupt Vietnam’s coffee exports as foreign interest simmers, market analysts said on Thursday, after the Federal Reserve raised the dollar rate for the second time in three months.

Responding to steady economic growth, strong job gains and confidence that inflation is rising to its target, the U.S. central bank raised its target overnight interest rate on Wednesday by 25 basis points to a range of 0.75 percent to 1.00 percent, as was widely expected.

Wall Street’s top banks expect two more interest rate hikes this year, and most expect at least three more in 2018, a Reuters poll showed.

A higher dollar rate tends to result in lower global prices of commodities, but London robusta futures prices bucked the trend on Wednesday, and the May contract closed up 0.51 percent at $2,180 a ton.

At the previous Fed rate hike on December 14, robusta futures also climbed as rain slowed the coffee harvest in Vietnam, the world’s biggest robusta producer and exporter. Last year, Vietnam also seized the crown from Brazil as the world’s biggest coffee exporter between April and July.

Domestic currency weakening against the dollar often supports exports, but Vietnam’s central bank let the Vietnamese dong gain slightly on Thursday, setting its official exchange rate for interbank transactions at 22,252 dong per dollar, from 22,262 dong the previous day.

“It is obvious that funds and traders have previously built in prices,” independent analyst Nguyen Quang Binh told VnExpress International, referring to robusta futures prices. He projected another slight increase on the London market for Thursday.

“It is a major risk for Vietnam as domestic prices are too strong, which prevents selling,” said the analyst.

As prices advance, coffee growers and exporters in Vietnam often hold back in the hope of higher profits. On the other hand, interest from foreign firms has slowed in recent weeks in the face of firming prices.

Binh said the country’s coffee export volume could shrink.

On Tuesday, the Vietnam Coffee and Cocoa Association projected a fall of 25-30 percent in shipments for the whole of 2017 after a record 1.78 million tons were shipped abroad last year.

Robusta beans rose to VND46.3 million to 46.6 million ($2,036-$2,049) a ton on Thursday in Dak Lak, Vietnam’s key coffee growing province, tracking gains in London, from VND46.1-46.4 million the previous day.

While the May robusta contract has risen 1.5 percent in the past month, prices in Dak Lak have increased around 2 percent and are now 11 percent higher since the current 2016/2017 crop year began last October. The country’s coffee season runs from October to September.

If domestic prices rise faster than futures prices, it could cause problems for coffee exporters who may face losses from buying beans on the local market at a higher price to cover contracts.

Besides, Vietnam is projected to face shortages of the bitter beans in May or June due to rising shipments and dwindling domestic stocks, an executive at top export firm Intimex said on Tuesday.

Vietnam’s latest harvest that ended in January yielded an estimated 1.6 million tons (26.7 million bags), down 8 percent from the previous season, the U.S. Department of Agriculture said in its December 2016 report.

“Growers still have ample stocks, but many poor families have already sold their crops,” said a Vietnamese dealer in Buon Ma Thuot, the capital of Dak Lak.

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