Cocoa Prices Able To Hold Their Ground
Cocoa prices were able to hold their ground in front of critical data and central bank policy moves that could have a significant impact on its near-term demand outlook. With the market finding support from recent bullish supply developments, cocoa may be setting the stage for a upside move. Mostly dry and hot weather over West African growing areas during the past few months provided early support to the cocoa market as that should have a negative impact on the region’s upcoming production. Recent weekly Ivory Coast port arrivals have come in below the comparable period last year, while Nigeria and Ghana have dealt with disease outbreaks early this season. A negative shift in global risk sentiment following European and US economic numbers fueled a 60 point selloff from cocoa’s midsession high yesterday. The FOMC results after cocoa’s close included a statement that inflation remains elevated, but Fed Chair Powell’s comment that the disinflationary process has begun may provide a longer-term benefit for cocoa’s demand prospects.
Although coffee may slide further to the downside this week, bullish supply developments should help coffee prices find their footing. March coffee closed lower yesterday after reaching a new 3-month high. This broke an 8-session winning streak. The Honduras Coffee Institute reported that January exports came in 13% above last year’s total, which put significant early pressure on coffee prices as their exports during the fourth quarter were well behind last season’s pace. The Brazilian currency fell back sharply from a 3 1/2 month high, and that put additional pressure on the coffee market. Rabobank reduced their forecast for a 2023/24 global production surplus forecast from 4 million down to 1.6 million bags, due in part to global demand increasing from 169.5 million up to 173.2 million bags. Brazil exported 169,553 tons of coffee in January from 178,000 051 tons last year.
After all the bullish news since the close yesterday, the minor bounce overnight (which could not even take out yesterday’s high) is a disappointing development for the cotton bulls. If export sales are disappointing, the market looks vulnerable to a setback. March cotton closed lower yesterday as the market continued to consolidate inside a range it has held for the past two and a half months. Traders were waiting for the results of the FOMC meeting, which were released late in the day. The result of the meeting was a 25 basis-point rate hike, which was right on expectations. The dollar broke sharply on the news, and stocks and bonds rallied. This action should be supportive to cotton in upcoming sessions. The trade will be looking ahead to the weekly export sales report to see if the strong pace of the past two weeks will continue. News this week that China’s mills have been running at about 90% of capacity as they have been recovering from the Covid shutdowns could have traders hopeful for another strong week of export sales.
A key reversal for March sugar from an extreme overbought condition and from a new six-year high is a bearish technical development. The market turned down after closing higher for seven sessions in a row, and the increasing open interest suggests active fund buying. Domestic consumption is normally near 2.5 million tons so the rest will be exported. For the 22/23 season, most traders see a significant global production surplus. A heavy selloff in energy prices and a pullback in the Brazilian currency put significant carryover pressure on the sugar market, as that could weaken near-term ethanol demand. More than three-quarters of India’s 2022/23 sugar production from last season will come from the state of Maharashtra as heavy rainfall will cut back on cane availability and cause many of their mills to close more than one month earlier than normal.
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