Bear Market Hits Cocoa

COCOA

The cocoa bull market has become an entrenched bear market with analysts suggesting the historically severe supply crimp is easing. Technical signals have also turned bearish with the downside extension this week reaching the lowest prices levels since last November. It appears that a normal ebb and flow of demand is set to be exaggerated by global slowing and structural demand destruction following 11 months of cocoa prices in a range of $7,000 to $10,000 per ton. Expectations for a good 2025/2026 Ivory Coast crop have surfaced with the new season beginning yesterday. In fact, expectations project strong early arrivals at the Ivory Coast partly because of an attractive new farmgate price which was raised by 55.6% to 2800 CFA. Initial expectations were for a price increase of only 39%. Fortunately for the bull camp, US and European Grind numbers will not be released until October 16th but it appears the market is already moving to factor in soft demand.

COTTON

The fundamental structure of cotton remains very bearish with tremendous oversupply sentiment a fixture in the market. Certainly, world ending stocks have drifted slightly lower since 2022, and stocks to use figures are likely to post a fourth straight year’s decline but threats against supply are very scarce. However, from a 20,000 foot view, world ending stocks and stocks to usage figures are significantly less bearish than the ultra-bearish condition from 2012 to 2014 when monthly cotton prices fell below 60. Therefore, cotton prices are approaching classic fundamental value but unfortunately for producers and futures longs nearby prices are still 300 points or more above what we would consider to be strong value.

COFFEE

While the trade basically discounted extremely tight exchange stocks in the second half of September, it is possible that the 50% tariff on Brazilian coffee imports could be lifted in upcoming talks between the US and Brazilian presidents. However, there is not a specific date for the talks yet. Unfortunately for the bear camp the trade is likely to temporarily discount a 2.4% increase in Ugandan coffee exports reportedly from a “good harvest”. In fact, Uganda exports have risen 27% on a year-over-year basis. Fortunately for the bull camp, a trend of buying by the Commodity Index Traders has emerged from the middle of August with the net long 11,000 contracts below the 2025 high. While some traders are suggesting the recent rally was merely short covering rally that argument might be partially confirmed by open interest on the rally falling from 169,876 contracts to 165,749 contracts (-2.6%). Furthermore, dry conditions in Brazil are expected to be mitigated with incoming moisture and that could make this week’s high at 388.30 solid. On the other hand, short-term technical signals favor the bull argument with momentum indicators like stochastics signaling a buy around last week’s quasi double-low, the regaining the 20-day moving average and the recent trade above the 50% retracement of the August and September washout.

SUGAR

Like cotton, sugar was significantly oversold into the recent low in most standard technical measures. However, the late August low to high bounce of nearly 100 points has corrected some of that long-term oversold condition. Furthermore, fresh supply pressure is emerging with fear of incoming supply manifested by very large deliveries against the expiring October contract. In fact, harvest conditions in Brazil are very favorable and available supply should build in the coming weeks. Yet another bearish supply item is expectations of a larger Thai crop in the coming season with projections of 10/11 million tons expected above 10 mt last year. Good conditions in Thai cane growing regions are expected to offset some isolated disease losses. As in many other commodity markets, the sugar trade is besieged by fears of soft global demand which has been fanned by concerns of a notable softening of Indonesian demand. Indonesian demand has held at seven year lows with Indonesia the second largest buyer in the world. In an indirect but longer-term bearish development, India is reportedly considering the use of corn as a feedstock to produce ethanol in the country which would reduce sugar consumption.

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