Coffee Demand Issues Return
Coffee’s demand issues returned to a front and center issue as they prevented the market from climbing above the early December high on Friday. The global supply outlook remains potentially supportive, however, so coffee prices should remain well supported on a near-term pullback. There has been a buildup of coffee stocks in the US and the Euro zone that continues to weigh on coffee prices. In spite of a pullback in recent months, inflation remains at high levels in many developed economies which continues to pressure coffee prices as that may diminish the out-of-home consumption outlook. The world’s 2 largest Arabica producing nations (Brazil and Colombia) continue to face production issues from a La Nina weather that is not expected to finish until the first quarter of 2023.
While the market is heading for a second sizable global production deficit in a row, cocoa continues to face headwinds from near-term demand concerns. For the week, March cocoa finished with a loss of 29 points (down 1.2%) which was a second negative weekly result in a row. Continued weakness in European and US equity markets put carryover prices on cocoa prices as that may weaken near-term demand prospects in both regions. The Eurocurrency and British Pound followed through on Thursday’s pullback with moderate losses that also weighed on cocoa prices going into the weekend. Although last Friday’s Euro zone CPI reading had a sizable pullback from the previous month, it was the Euro zone’s second highest year-over-year CPI result on record. High inflation has led to a sizable increase to costs for regularly purchased items, and that had led many consumers to pull back on purchases of discretionary items such as chocolates. Although this season’s Ivory Coast port arrivals have climbed ahead of last season’s pace, outbreaks of black pod disease in Ghana and Nigeria make it unlikely that overall West Africa 2022/23 cocoa production will have a sizable increase from last season’s total. As a result, the 2022/23 season should result in a global production deficit of 200,000 tonnes or larger.
March cotton managed to close higher on the session Friday with an outside day up, and also closed higher on the week. While outside market forces carried a very negative tilt due to concerns for global economic recession, traders view the current set up for planted area in the US to drop off sharply. Some traders see a sharp drop in planted area for the coming season, and this continues to provide underlying support. The market has stayed in a consolidation pattern since early November and some traders see the price as too cheap. The International Cotton Advisory Committee indicates global cotton consumption for the 22/23 season will come in more than 1.4 million tonnes below production, leaving a global production surplus of 1.4 million tonnes. The US dollar fell to the lowest level since June last week which is a positive force. In India’s textile industry, manufacturers have sought duty free imports of cotton, saying that higher domestic prices have hit profit margins.
Near-term bullish supply developments helped to lift sugar prices up to a new 5 1/2 year high on Thursday and the key reversal is a bearish technical development. For the week, March sugar finished with a gain of 49 ticks (up 2.5%) which was a third positive weekly result in a row. A mild recovery in the Brazilian currency provided sugar with carryover support as further strength in their currency will ease pressure on Brazil’s Center-South mills to produce sugar for export. Even so, those mills have kept sugar’s share of crushing well above last season’s comparable levels. Crude oil and RBOB gasoline posted sizable weekly gains last week which helped sugar prices to find their footing on Friday, but they remain far below levels that would encourage Center-South mills to shift a large portion of their crushing from sugar production over to ethanol production. The Brazilian trade group Unica said that over 60 Center-South mills will continue their operations into early January, and that should result in 2022/23 Center-South sugar production coming above last season’s total.
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