Cocoa Gains Limited by African Rains

COCOA

While the cocoa market has managed to “bounce” supply side fundamentals still favor the bear camp with recent rains likely to provide African crops with a noted cushion against Harmattan hot and dry winds which typically emerge at this time of the year and can last into the month of March. Not surprisingly, recent production expectations for the Ivory Coast main crop were boosted especially with the Ivory Coast dry season in some year’s beginning in the second half of November. Recent rains were reported at 18.9 mm which “surpassed” the five-year average by 10.2 mm. However, the market should see value above $5500 in the March contract given a 2025/2026 reduction in the world cocoa surplus of 41% from Citi. Citi pegs the surplus at 79,000 tons versus a previous estimate of 134,000 tons. Apparently, the bank sees improved grindings but also sees $300 to $500 of further downside in New York prices with the low in 26 likely to be above $5000 per ton. The Citi surplus reduction combines with a surplus reduction by Rabobank. Cocoa stockpiles at US ports fell by 4,268 bags to stand at 1.65 million yesterday. Initial resistance in March Cocoa is $6,269 with key support at $5,822 and uptrend channel support at $5,932. With the managed money positioning reaching the largest level since November 2022 the prospect of further but limited short covering gains are good.

COTTON

With yesterday’s downside extension posting fresh contract lows, the dollar recovering overnight and a very poor seasonal demand window (the most recent export data showed net sales nearly 40,000 bales below the previous week) and the latest COT report showing some short covering, the cotton market has further downside potential. As indicated yesterday, cumulative net sales are the lowest in 11 years and only 49% of the USDA forecast which is also well under the five-year average pace of 65% of the USDA forecast. We suspect the dollar dive prior to the recovery this morning will produce temporary favorable US export data but that may only slow the pace of declines ahead. Granted, the last COT positioning report is missing 16 days of lower trade which has likely rebuilt short positioning. The most recent managed Money net short positioning reading was 20,000 contracts above the low for the year which means further managed money selling is possible on further dollar decline inspired gains.

COFFEE

With this morning’s low matching the lowest price since October 1st and a previous pattern of soft Brazilian coffee sales to the US (because of the tariffs in place into the end of November) the slide in coffee prices is justified. In fact, both arabica and robusta sales from Brazil are down from year ago and five-year average levels by significant percentages. While US demand is expected to improve following the reduction in tariffs a gradually acceleration of the harvest in Vietnam is expected and the trade is also faced with a much lower $3.00 per pound 12 month downside price target from Citi.

SUGAR

With March sugar trading in the lower end of the past five trading sessions and in the middle of the last 22-day sideways consolidation pattern the market should be nearly value. While not a major development or a noted price reaction, the UNICA report on Brazil Center South sugar production posted lower second half of November production compared to year ago and five-year average levels. Furthermore, the sugar share of the Brazilian crush for sugar continues to fall and is 9.1% below last year’s levels. Apparently, margins favor the production of ethanol which should take some supply pressure off sugar. Unfortunately for the bull camp, Brazilian cumulative sugar production at 39.9 million tons is running above the previous year’s tally of 39.4 million tons or 1.13% ahead of year ago levels The Center – South cane crush for the second half of November was .2 million metric tons below year ago and slightly less than 3 million than the cane crush from the first half of November. Other supportive news from the UNICA report is a lower yield of sugar produced per ton of cane during the second half of November and the fact that total sugar production in the second half of the month was 344,000 below the first half of November. However, according to the USDA, global sugar output ahead will increase by 4.6% given better production in Brazil and India.

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