Coffee Technically Overbought

COFFEE

Coffee prices have extended their rally to 4-month highs, but have also reached technically overbought levels. While the market is vulnerable to a pullback, bullish near-term supply developments should help to underpin prices. The continued drawdown in ICE exchange coffee stocks has been a recent source of strength for the market as it shows further tightening with near-term supply, particularly in Europe. Many analysts are starting to dial back their forecasts for Brazil’s 2023/24 crop, and that will help to underpin prices this week. Heavy rainfall over Brazil’s major Arabica growing regions over the past month may cause production issues for their upcoming 2023/24 crop, with area of south Minas Gerais receiving 150% of their average while the Zona de Mata regions had 2 to 4 times the average rainfall. In addition to the lack of sunshine, this has prevented application of fertilizers and pesticides which have underpinned coffee prices this week.

COCOA

While cocoa prices slowed their ascent, they continue to extend their February rally even further into new high ground. While the market is well into overbought territory, near-term supply issues should help cocoa remain well supported on a pullback. While European equities posted mild losses, a sizable pullback in the US stock market put late pressure on the cocoa market and kept further gains in check. Reports that Ivory Coast’s government has told export firms not to build stockpiles of cocoa beans or purchase additional beans due to the threat of defaults have underpinned cocoa prices. A shift back to more normal “dry” season weather over West African growing areas has also provided support to the cocoa market as those conditions will have a negative impact on their upcoming output. There will readings on German CPI and Italian CPI early in the day and the latest FOMC meeting minutes after the close, so the cocoa market will have fresh inflation data and comments that could swing the demand outlook either way.

COTTON

May cotton experienced a sharp rally early in the session yesterday, but the market gave up most of its gains by the end of the session and closed only slightly higher on the day. The dollar was higher, and the stock market sold off, both of which were negative for cotton. For the USDA Outlook Conference this week, a Bloomberg survey has an average trade expectation for US 2023/24 cotton planted area at 11.4 million acres, with a range of expectations from 10.0 to 13.5 million. This would be down from 13.8 million in 2022/23. Production is expected to come in around 16.0 million bales (range 14.0-19.0 million) versus 14.7 million in 2022/23. Consumer debt is mounting and consumer spendable income may decline and global demand may also trend lower. However, short-term demand for US cotton is strong with high sales of the last two weeks.

SUGAR

Sugar has benefited from bullish supply news from India this week. Unless it can find additional support from key outside markets, sugar may turn back to the downside at any time. A mild rebound in energy prices provided underlying support, but crude oil remains well below their late January highs. As a result, Brazil’s Center-South mills are unlikely to have a significant shift in crushing towards ethanol production when they restart their operations next month. Updated reports that cane yields in India continue to deteriorate have given a significant boost to the sugar market, as that indicates that their 2022/23 sugar production will come in well below last season’s total. That should result in India not allowing any additional sugar exports this season beyond the 6.1 million tonnes in their first export tranche.

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