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Cocoa Could See Volatility


Until there are more indications that demand will improve or that El Nino is starting to affect the weather in west Africa, the cocoa market could see volatile action. The likelihood that El Nino will result in a third global production deficit in a row next season has been a source of underlying support, but the dry weather it is expected to bring has yet to appear. A shift towards wetter weather last week has weighed on prices, with farmers reporting abundant rains in most of Ivory Coast’s main cocoa growing regions. They also said there were more sunny spells, which should help the fruits develop. Crop concerns remain, especially for Ghana, with concerns about disease and reduced fertilizer and pesticide usage. So far chocolate manufacturers have been able to pass along higher prices to the consumer without seeing their profits diminish, but there is a concern that demand will reach a tipping point if they try to pass along any further increases. China’s lukewarm economy could further dampen the demand outlook for Asia.


With a large Brazilian crop priced-in, any signs of improving demand can help coffee sustain a recovery move. The long-term decline in inflation in many developed economies should support coffee shop and restaurant consumption. ICE exchange coffee stocks were unchanged on Monday but remained at their lowest levels since November, and that has provided additional support to the market. Colombia’s coffee federation has estimated their nation’s 2023 coffee production at 12.08 million bags, and they expect July-December output to come in 24.8% above last year. Colombia has not seen a 12-month production total above 12 million bags since August 2022.


US cotton crop conditions declined again last week, and the market was moderately higher overnight, but it seems to be more worried about demand. The weekly Crop Progress report showed 33% of the US cotton crop was rated good/excellent as of August 20, down from 36% the previous week, below the 10-year moving average of 50% and just above the record low of 31% from a year ago. The weather forecasts call for above normal temperatures to continue across Texas and the Delta out through the next two weeks with below normal precipitation, which does not leave room for much improvement. The cotton market seemed to garner support yesterday from news that China had cut its near-term rates, but that optimism did not last. The central bank was working to shore up the Chinese yuan, which is down more than 5% against the dollar this year. China has been selling about 12,000 tonnes per day out of its reserves, and it had been hoped that this would eventually spur more purchases of US cotton. China has been the US’ largest customer this year, and they still dominate the weekly export sales, but their cumulative purchases for 2023/24 are the second lowest for this time of year since 2016. Record low monsoon rainfall for the first half of August in India is starting to dry out soils, and moisture stress could emerge as the month progresses.


Brazilian sugar production has remained well ahead of last season’s pace, and the market could be setting up for a downside breakout move. Reports of low monsoon rain amounts in India so far this month lent support yesterday, but that it didn’t last, and October sugar closed sharply lower with an outside reversal down. The market still faces heavy production out of Brazil and poor demand from China. China imported 110,000 tonnes in July, down 60.5% from the same month last year. A report from ING said that some big importers in China were drawing down domestic inventories because of high global prices. If Brazil’s Center-South mills continue to hold sugar’s share of crushing near current levels, they could see record exports in 2023/24. Indian officials report that in the first 17 days of the month their nation received 3.6 inches of rain, nearly 40% lower than normal and much lower than an expected 8% decline. This was the driest for that period since records began in 1901.


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