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Back-to-Back Global Production Deficit?


Improved global risk sentiment in the wake of last Friday’s US jobs data, bullish equity market action, and a forecast the second global production deficit in a row could put the cocoa market in position to break out above its recent consolidation. July cocoa finished last week with a gain of 35 points (up 1.2%) for its third positive week in the past four. The steady decline in consumer inflation is expected to support consumption of discretionary items like chocolate. The latest supply/demand update from the International Cocoa Organization more than doubled the size of the 2022/23 global production deficit from their previous forecast. This would result in the largest back-to-back deficit total since ICCO records began in 1960.


July coffee had an outside reversal down day on Friday, which could pressure the market early this week. However, ICE exchange stocks continue to fall, which suggests strong demand. The demand outlook should improve as inflation declines, especially for coffee shop and restaurant sales. The Brazilian real rallied to a 1 1/2 week high on Friday, and it is approaching its highest level since 2020. The strong currency should ease pressure on coffee growers to market their crops aggressively. Dry weather over Brazilian growing areas is expected to speed up the pace of the Arabica harvest, and this weighed on coffee prices late last week. As with many commodities, coffee’s demand outlook has been recovering from the impact of the COVID pandemic. 2022/23 global consumption reached a record 167.945 million bags, but that was up only 742,000 bags from 2021/22. Traders are looking for more gains in the coming year.


July cotton closed a bit weaker on Friday after the dollar strengthened, but December cotton held its gains. US cotton export sales for the week ending May 25 came in at 267,767 bales for the 2022/23 (current) marketing year and 75,567 for 2023/24 for a total of 344,328. This was up from 215,549 the previous week and was the highest they had been since February 16. China was the largest buyer at 230,544 bales, followed by Turkey at 64,255. China has the most commitments for 2022/23 at 3.219 million bales, followed by Pakistan at 2.064 million. The fact that China emerged as a strong buyer could be encouraging for the bulls.


Sugar’s inability to benefit from strength in key outside markets or from improving global risk sentiment shows the impact of the bearish Brazilian supply outlook on the market. With few signs that Brazil’s Center-South production will slow down, prices are likely to remain on the defensive. July sugar fell a 5 1/2 week low on Friday and finished with a moderate loss. The market fell despite significant, two-day rallies in crude oil, gasoline, and the Brazilian currency, which would normally be expected to lend support to the market. Brazil’s Center-South cane harvest was running 24% ahead of last year’s pace by the middle of May, and sugar’s share of crushing was 7% above last season. This put Center-South sugar production 48% ahead of last season’s pace. This coupled with the processing of leftover cane from last year could result in significantly higher Brazilian sugar supply by the end of the second quarter. The Unica Center-South (Brazil) supply report for the second half of May is due later this week, and it is expected to show sugar production and cane crushing ahead of last season’s pace.


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