Cocoa Nears Multi-Year High

COCOA

Cocoa’s 201-point rally over the past 4 sessions has taken the market to within 40 points of a new multi-year high. A major “macro” event may encourage some volatility, but a bullish supply/demand outlook can help cocoa hold its ground near its March highs. Global risk sentiment continues to improve following this month’s risk flare-up, and that provided a boost to the near-term demand outlook of discretionary items such as chocolates. Although the British Pound had a sizable pullback, that was offset by a sharp rally in the Eurocurrency which gave the cocoa market an additional source of strength as it will help European grinders with acquiring near-term supplies. Today’s FOMC meeting results will come out after cocoa’s close and include the Fed’s quarterly economic projections for PCE and core PCE inflation. If those projections are upwardly revised show that inflation will remain stubbornly high this year and next year, it could have a chilling effect on cocoa’s North American demand outlook.

COFFEE

Coffee prices have started to recover from the February/March pullback but continue to face headwinds from near-term demand concerns. Below normal rainfall over Brazil’s major Arabica growing regions last week gave coffee some support. ICE exchange coffee stocks fell by just 288 bags after a third session in a row in which no coffee went through the grading process. However, their recent pullback has provided the coffee market with underlying support as that may indicate some improvement in the near-term European demand outlook. Today’s FOMC economic projections will come out after coffee’s close and if they avoid an upward adjustment for inflation forecasts, it would benefit the coffee market as it should strengthen this year’s out-of-home demand outlook. Coffee has been unable to shake off volatile price action this month and could be pressured by additional long liquidation before the FOMC meeting results.

COTTON

May cotton closed slightly higher yesterday but spent the session inside Monday’s range. Outside markets lent support, as some of the worries about the current banking crisis eased. The dollar index traded to its lowest level since February 14, which was supportive, and crude oil and the stock market were higher, also supportive. However, the grain markets were weaker, which may have countermanded some of the support from the other outside markets. With planting season approaching, growers will be weighing planting cotton with soybeans, and lower soybean prices reduce the reasons for cotton growers to switch.

SUGAR

Sugar prices have found fresh carryover support from a key outside markets. The near-term global supply outlook is likely to take a bearish shift over the next month, however, and that leaves sugar vulnerable to a near-term pullback. A continued rebound in crude oil and RBOB gasoline prices provided the sugar market with carryover support as that should help to strengthen near-term ethanol demand. Energy prices need to reach much higher levels to shift a large portion of Center-South crushing from sugar production over to ethanol production. The prospect of increased Chinese sugar imports this year after their government downwardly revised their production estimate has also underpinned sugar prices early this week.

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