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Cocoa Vulnerable to Near-Term Pullback


While cocoa was able to avoid downside follow-through from a negative weekly reversal, the market continues to have problems overcoming near-term demand concerns. Unless there is a significant rebound in global risk sentiment, cocoa remains vulnerable to a near-term pullback. Sluggish European and US equity markets dampened cocoa’s near-term demand outlook as a “risk off” mood is likely to diminish purchases of discretionary items. In addition, a sizable pullback in the Eurocurrency put carryover pressure on the cocoa market as that will make it more difficult for European grinders to acquire near-term supplies. The latest weekly reading for Ivory Coast port arrivals came in below the comparable period last year, although their full season arrivals total continues to be ahead of last season’s pace. While their dry season should continue for another month or so, there was above-average rainfall over many West African growing areas last week. While temperatures remain warm, this rainfall should benefit the region’s upcoming mid-crop production.


In contrast to many other commodities, coffee was able to overcome a “risk off” mood at the start of this week. Demand concerns continue to cast a shadow over coffee prices, particularly in China, and that will leave them vulnerable to a near-term pullback. A Reuter’s poll indicated that traders expect an annual drop of near 12% in coffee prices for 2023. Brazil production is expected to climb to 67.1 million bags which would be up from an average estimate of 61.5 million bags for the 22/23 season. Before the crop was developed back in July 2022, a similar poll pegged to the crop at 71 million bags. ICE exchange coffee stocks were unchanged for a second session in a row as there was no coffee graded at any of their warehouses. This provided further evidence that ICE exchange coffee stocks may be approaching a near-term top, as there are less than 37,000 bags still waiting to be graded. There is a more than 80% chance that the current La Nina event will conclude during the March/May timeframe.


March cotton broke below a two-week consolidation and traded to its lowest level since January 18 yesterday. A key factor driving the market lower was the rally in the dollar that has come in the wake of last week’s strong US jobs report. Also, tension between the US and China in the wake of the US shooting down a Chinese spy balloon over the weekend have raised concerns about US cotton exports to China. China has been the largest buyer of US cotton so far this marketing year. For the USDA WASDE report on Wednesday, the average trade expectation for US 2022/23 production is 14.56 million bales, with a range of expectations from 14.28 million to 14.68 million. This would be down from 14.68 million estimated in January.


The market has maintained downside momentum and retraced a sizable portion of their late January rally. Unless global risk sentiment and key outside markets can regain some strength, sugar is likely to remain on the defensive. The Brazilian currency extended its pullback to a 2-week low which put carryover pressure on the sugar market as that will encourage Center-South mills to produce sugar for export. Crude oil and RBOB gasoline prices rebounded but they remain far below their late January highs. As a result, Center-South mills are unlikely to have a significant shift in crushing from sugar production to ethanol production when most of their mills resume operations in March or April. Indications that Brazil and Thailand will have larger production this season remains a source of pressure. Both nations are likely to have a sizable uptick in exports from last season, and that will help offset any shortfall if India prevents any further sugar exports this season.


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Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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