Sweeping Key Reversal in Sugar
The sweeping key reversal would suggest that a major top may be in place. While sugar prices have found carryover support from key outside markets, they continue to have a bearish longer-term supply outlook. The market rallied up to a new 5 1/2 year high before closing sharply lower on the session yesterday. Reports of early harvest delays in Thailand provided sugar prices with early support as that will cut into their December and January exports. India’s Food Secretary said that their government would consider allowing an additional tranche of sugar exports as soon as next month, which may be earlier than the market expected and bodes well for their full-season production outlook. Pakistan lifted a ban on sugar exports, which is a strong sign that they will not be an aggressive importer this season. A negative turnaround in crude oil and RBOB gasoline prices put carryover pressure on the sugar market as they could diminish near-term ethanol demand in Brazil and India. When combined with a moderate pullback in the Brazilian currency, it triggered a wave of profit-taking and additional long liquidation in the sugar market.
Cocoa prices have been pressured by negative guidance on inflation during the past 2 sessions, but they remain well above the November lows. Euro zone inflation comments from ECB President Lagarde that the Euro zone would face a mild recession while hiking rates weighed on the cocoa market. This may weaken near-term demand prospects for a region which is the largest processor of cocoa beans. In addition, a negative shift in risk sentiment led to heavy losses in European and US equity markets, the British Pound and the Eurocurrency, all of which put carryover pressure on cocoa prices. In spite of China continuing their Zero Covid policy into the fourth quarter, Asian demand is expected to stay fairly resilient following second and third quarter grindings totals coming in above last year’s levels. West Africa is well into their dry season with mild Harmattan winds arriving in some areas, but soil moisture levels should remain adequate through year-end. Global demand remains in a longer-term uptrend with 2022/23 grinding likely to post a third record high full-season total in a row.
Coffee prices will continue to face headwinds from near-term demand concern, but they appear to have taken a decisive move above the November and December lows. The market rallied to a 2-week high and closed higher for a fourth positive daily result in a row. The Brazilian government agency Conab upwardly adjusted their nation’s 2022/23 Arabica production forecast by only 310,000 bags to 32.7 million. This would still be their second lowest Arabica crop over the past 9 “on-year” seasons and provided a significant boost to coffee prices. The current La Nina weather event has negatively impact upcoming production in Brazil and Colombia, and that provided additional strength to the coffee market with both nations combined accounting for half of global Arabica output.
Given the bearish outside market forces this week, the market has held up fairly well. The market has stayed in a consolidation pattern since early November and some traders see the price as too cheap. A sharp break in the stock market plus weakness in energy and metal markets plus a rally in the US dollar were all seen as negative forces. The sharp break during September and October pushed the market down to so-called bargain price levels. However, the break does not seem to have stimulated export demand. Cumulative sales have reached 72.5% of the USDA forecast for the 2022/2023 marketing year versus a 5 year average of 71.8%. Sales need to average 87,000 bales per week to reach the USDA forecast. With slow consumer demand for apparel in Asia, Europe and the US, it may be difficult to keep the pipeline flowing and this could cause import demand to drop further. The USDA lowered its global consumption forecast by 3.3 million bales for a 4.9% decline in world cotton usage.
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