Impressive Run for Cotton Market

COTTON

July cotton traded to its highest level since February 13 yesterday, taking out previous highs from May 8, April 19, and March 2. The market has closed higher for four straight sessions. This has come in the wake of last Friday’s USDA supply demand report, in which US ending stocks for 2022/23 were lowered from 4.10 million bales to 3.50 million. This would be their lowest since 2020/21 and their second lowest since 2016/17. The fact that the market rallied so sharply in the face of a stronger dollar and a steep selloff in the grains was impressive, although it did garner support from gains in equities and crude oil. The weekly export sales reports have been consistently strong for the past three weeks, and another strong report on Thursday would help justify Wednesday’s rally. However, if the report comes up short, it could spark a selloff.

COCOA

Cocoa’s demand issues will not be fully soothed until inflation has fallen to lower levels. With the market already receiving bullish supply developments, however, cocoa prices should be well supported on corrective breaks. While their latest reading was in-line with trade forecasts, an uptick in the year-over-year Euro zone CPI reading pressured cocoa prices early in the day. While well below last year’s levels, high inflation may weaken near-term chocolate demand in Europe which remains the largest grinding region. West Africa’s early mid-crop harvest has seen many cocoa beans that are smaller and have lower quality than normal. Those beans will be diverted towards their domestic cocoa processing firms, and that should result in Ivory Coast increasing its lead as the world’s largest cocoa grinding nation. This could also result in lower than expected full-season production and will likely reduce the amount of export-quality beans available to buyers.

COFFEE

Coffee prices continue to have trouble maintaining upside momentum as Tuesday’s upside breakout move failed to lift the market above its recent consolidation zone. However, the market has seen a bullish shift in recent supply/demand news. There is dry weather in the forecast for Brazil’s major Arabica growing regions through late next week, and that has pressured coffee prices as that should help to speed up this year’s harvest. Brazil’s Robusta harvest started earlier and is 30% complete in some locations, which will help to ease tight global supply levels and has put carryover pressure on Arabica prices. In addition, reports that Peru’s upcoming 2023/24 coffee production will have a 16% increase from this season also weighed on coffee prices.

SUGAR

Sugar’s coiling action during May so far has kept the market in close proximity to its multi-year high from late April. However, an inability to benefit from significant carryover support from key outside markets may indicate that sugar may be set up for a sizable downside move. Brazil’s Petrobras has changed their pricing policy for their domestic gasoline prices, which in turn has pressured the sugar market. Brazil’s Center-South domestic ethanol sales last month came in below last year’s total, and the prospect of lower gasoline prices may further erode Brazilian ethanol demand.

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