Higher Price Levels for Cocoa?
While cocoa’s demand outlook remains in question, it has received fresh bullish news from the supply side of the market. Although it may continue to see volatile action over the next few weeks, cocoa appears to be heading for higher price levels during the second quarter. Reports that several Ivory Coast exporters are unable to fulfill their near-term contracts continues to be a major source of strength to the market. In contrast to recent defaults that were caused by a lack of financing, this current situation is due to a near-term shortage of cocoa beans. Recent Ivory Coast port arrivals have been well below the comparable totals seen the previous year, while an increasing amount of beans are being diverted towards their domestic cocoa processing industry. In addition, recent hot and dry conditions over West African growing areas provided cocoa with additional support as that will have a negative impact on the region’s upcoming mid-crop production.
Despite fresh bullish supply news, coffee prices failed to sustain an upside breakout move. Even with a rebound in global risk sentiment, coffee may be setting the stage for a sizable downside move. There is increasing market optimism over Brazil’s upcoming 2023/24 “off-year” crop that it will exceed this season’s production total, and that has kept the coffee market from climbing above the 3 ½ month high from February 1st. The Brazilian currency extended its pullback, and that could be an additional source of pressure on the coffee market. ICE exchange coffee stocks (most of which are housed in warehouses in Belgium and Germany) fell by a sizable 25,165 bags on Wednesday and are now than 16,000 bags below their January month-end total. In addition, it has been several sessions in a row that no coffee bags were submitted to the ICE exchange grading process.
The lowest close for May cotton since January 13 leaves the market vulnerable to a long liquidation selloff unless the export sales pace remains high. Last week, sales came in at 262,800 bales which was a marketing year high. A surge higher in the US dollar and a risk off tone for commodity markets helped to pressure. Traders remain concerned with global economic slump which could pressure demand. Fears of very slow sales from Turkey and even cancellations due to the earthquake added to the negative tone. While there was weak technical action, the market remains in a consolidation since November 4.
This week’s choppy price action has kept the sugar market below last week’s highs and well below the early February high. Even with recent bullish supply developments, sugar looks to be overvalued at current price levels and could see a sizable pullback. A sharp selloff in energy prices following the weekly EIA report put carryover pressure on the sugar market, as that is likely to weaken near-term ethanol demand in Brazil and India. As a result, that should offset recent support from indications that Brazil’s government will reinstate gasoline fuel taxes next month which will give a boost to Brazilian domestic ethanol demand. The Brazilian currency extended its pullback with a second sizable loss in a row, and that put additional pressure on sugar prices as it will encourage Center-South mills to produce more sugar for export.
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