May 11, 2018 / 1:03 PM / in 7 months

Louis Dreyfus loosens grip on robusta coffee stocks ahead of contract change

* Louis Dreyfus sold bulk of certified robusta holdings -sources

* Giving up stocks ahead of changes to futures contract -sources

* New rules add to costs of July futures

By Ana Ionova

LONDON, May 11 (Reuters) - Louis Dreyfus Company has offloaded the bulk of its certified robusta coffee stocks ahead of a rule change that will make it more expensive to carry the coffee forward, industry sources told Reuters.

Some 59,270 tonnes of robusta coffee has changed hands in the delivery period that began at the start of this month, Intercontinental Exchange (ICE) data showed on Friday.

This is equivalent to about 76 percent of certified stocks currently held in European warehouses.

Industry sources said the bulk of this was tendered on behalf of Louis Dreyfus Company (LDC), signalling that the trade house is unwinding its majority hold on certified stocks.

LDC declined to comment.

Ownership of certified robusta stocks is often seen as a strategic move because it can give trade houses a bigger sway over the structure of the futures market.

Four industry sources said that the key driver behind LDC’s move was a looming change to exchange rules, which will add extra costs to robusta contracts from July, the next delivery period.

“Commercially, it didn’t make sense to hold it,” one source familiar with the matter told Reuters. “It didn’t get to the point where you were even close to breaking even.”

The rule change is the latest in a series of reforms to the robusta contract in recent years after complaints that the exchange was failing to stop abuses such as steep rent charges and long warehouse loading delays.

Under the new rules, sellers of certified robusta stocks will have to absorb a load-out cost of about $35 a tonne, effectively making contracts from July onward “free on truck”.

Previously, the buyer had to cover these load-out charges if they wanted to transfer the coffee out of the warehouse.

“With the rule change, somebody is going to have to pay when they re-tender the coffee in July,” one of the sources said. “There’s going to be a cost associated with that.”

COSTLY TO HOLD

Since the start of the year, the spot May contract had mostly been at a discount of about $20-$40 relative to the July position, which partly offset the additional costs.

However, a drawdown in certified stocks has helped to keep spot prices relatively firm in recent months, limiting further weakening in the spread.

“I just don’t think the carry was there,” the first source said, estimating the spot discount would have to reach about $55 to cover all the costs of holding the stocks, including load-out, interest and rent.

Early this month spot prices shed their discount and levelled out with forward positions, making it even more expensive to roll long positions from May to July.

It is not yet clear who has taken over the stocks from LDC, but industry sources said they were purchased on behalf of at least three different firms.

While rolling the coffee forward into July may be costly, some offered good value, another of the sources said, since it was deeply discounted Brazilian coffee.

The scramble for such aged beans has been a key driver behind the drawdown in certified stocks. Under ICE rules, coffee stocks are subject to age discounts after 13 months.

Holding certified stocks is also strategically attractive and paying to roll the stocks forward was an “investment,” the source said.

“There’s still a level of control that’s exerted when you own the stocks,” the source said. “It’s a value judgment. The people who took delivery were making an investment that Dreyfus wasn’t willing to make at that price point. (Reporting by Ana Ionova Additional reporting by Gus Trompiz in Paris Editing by Nigel Hunt and David Goodman)

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