Vietnam coffee output to hit 4-year low - and could shrink furtherr

Vietnam's coffee harvest will fall to a four-year low, hurt by dryness which kicked in again last month – threatening a further downgrade to production hopes.

The US Department of Agriculture bureau in Hanoi forecast Vietnam coffee output, which is mainly of robusta beans, dropping by 7% year on year to 27.3m bags in 2016-17.

The outlook would have been worse were it not for access that many farmers had to irrigation water, both from reservoirs and underground sources.

"Despite the dryness, damage to the 2016-17 crop during the key flowering and fruit-setting stage (from January to early March) has been minimal," the bureau said.

'Adding stress'

However, the bureau added that there was scope yet for downgrades to its forecast for the world's top robusta harvest, given a fresh onset of dry weather.

"May rainfall… has been much lower than the same period in the last five years," the bureau said in a report.

"The lack of May rain is adding stress to coffee trees.

"If the lack of rains continues in June coffee crops will face additional losses."

Vietnamese production may fall by 15% this year, "should the drought be prolonged", the bureau said, flagging too the potential for weather disruption thanks to a swing from El Nino to La Nina conditions.

The country's Meteorology and Hydrology Department (GDMH) in its 10-day forecast (June 1 to June 10) sees rainfall in line with previous years and higher temperatures in the Dak Lak region, which produces 30% of the country's coffee output.

Exports are still up

The prospect of a drop in coffee production to 27.3m bags will drive exports down 2.1m bags to 24.5m bags in 2016-16 on an October-to-September basis, the bureau said.

Vietnamese coffee exports have been running above the five-year average since March, despite fears that dry weather would reduce available exports.

Coffee exports from Vietnam rose to 170,000 tonnes in May, and were up 58% year on year in the period between March and May 2016, according to the Customs department.

A possible reason behind the elevated exports may be due to Vietnam running down its carryover stocks from the previous season's record crop of 29.3m bags.

Also drought fears drove robusta prices higher which may have incentivised more exports. Prices in the Dak Lak region rebounded sharply by 70% to 36,900 Vietnamese dong per kilogramme since April.

The USDA bureau estimates Vietnamese coffee stocks to be at a three-year low of 3.48m bags due to lower coffee production caused by dry weather.

A sigh of relief

Robusta prices have seen a massive upswing this year, asMARKET SENTIMENT turned bullish on drought fears affecting Vietnam, the world's largest robusta producer, and the state of Espirito Santo in Brazil.

Together, both countries produce more than 60% of global robusta output.

However, some observers have stepped down concerns over Vietnam's robusta crop, thanks to the onset of some rains in April, with internationalTRADING COMPANY Olam International now expecting output to be lower by 5% year on year in 2016-17, vs a 15% year-on-year decline expected previously.

Aside from fundamentals and weather, the 4% appreciation in the Brazilian real so far in June has also been supportive of coffee prices. Brazil is the world's second largest robusta producer.

London robusta prices rose by 28% between March and May and isCURRENTLY TRADING up at $1,679 per tonne.

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