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Coffee Market Still Overbought


Since starting February with a negative daily reversal, the coffee market has been unable to sustain upside momentum. Although it has seen some demand improvement that can provide support, coffee prices remain vulnerable to a near-term pullback. Rainfall over Brazil’s major Arabica growing areas in recent weeks may improve the prospects for their upcoming 2023/24 crop. While the market still has a wide range of estimates for Brazil’s upcoming production, recent precipitation has offset the longer-term negative impact of drier than normal conditions from La Nina and has been a source of pressure on the coffee market. ICE exchange coffee stocks increased by 4,555 bags on Wednesday to reach their highest level since June 27th, which also weighed on coffee prices. On the other hand, there are just 3,000 bags left to be grades which indicates that ICE exchange coffee stocks may reach a near-term top well below the 1 million bag level.


Cocoa’s near-term demand concerns have been given added weight from a negative shift in global risk sentiment. The market continues to hold its ground above the 50-day moving average, however, as a bullish shift in the global supply outlook should underpin prices. Recent rainfall over West African growing areas may improve the prospects for the region’s upcoming mid-crop harvest, but updated weather forecasts have mostly dry conditions and daily high temperatures above 95 degrees Fahrenheit through late next week. West Africa normally has its dry season continue through mid-March, with these conditions likely to have a negative impact for upcoming production. The outlook for inflation levels in Europe and North America to continue their decline helped to underpin cocoa prices, as that should give a boost to demand for many discretionary items such as chocolates.


May cotton closed lower on the session yesterday with an inside trading day. The USDA supply/demand report showed US 2022/23 ending stocks coming in at 4.30 million bales, up from 4.20 million in January and counter to expectations that called for stocks to decrease to 4.08 million. World ending stocks fell to 89.09 million bales from 89.93 in January and below the average expectation of 90.06 million. The report was mixed, with US ending stocks increasing instead of decreasing as expected and world ending stocks decreasing instead of increasing as expected. Traders will be looking to today’s USDA export sales report for market direction. The question is whether the strong sales pace of the past three weeks will continue. China has been the strongest buyer so far this marketing year, and whether they will continue to buy aggressively is on everyone’s mind. In addition, Turkey was expected to be a major importer of 4.3 million bales this season but this is now in question with the major infrastructure damage.


While India’s government is looking more likely to prevent any further sugar exports this season, the 2 to 3 million tonnes of sugar that would have been in their second export tranche will be mostly made up for by increased exports from Brazil and Thailand. As a result, sugar prices remain overvalued and vulnerable to a sizable pullback. Crude oil and RBOB gasoline had sizable recovery moves late on Wednesday that provided carryover support to sugar prices as that may strengthen near-term ethanol demand. While India’s mills may divert 4.5 to 5 million tonnes of sugar toward ethanol production, Brazil’s Center-South mills actually increased sugar’s share of crushing by 0.9% this season. The USDA reduced their 2022/23 US production forecast from 9.248 million down to 9.231 million tons (8.374 million tonnes) as a sharp drop in Louisiana cane sugar more than offset an increase in beet sugar output.


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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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