Production Issues Underpin Coffee Prices

COFFEE

March coffee found mild early pressure but was able to follow-through on Monday’s wide-sweeping outside-day higher as it reached a 1 1/2 week high before finishing Tuesday’s trading session with a moderate gain. Production issues in Colombia and Brazil continue to underpin coffee prices as more than half of global Arabica output comes from those two nations. Guatemala’s November coffee exports were 31% below last year’s total, which is more evidence of Central American harvesting issues that are providing additional support to coffee prices. Restaurant and retail shop consumption has been diminished by high inflation in many nations, but Tuesday’s US CPI and core CPI reading showed a continued longer-term decline in year-over-year readings.

COCOA

While cocoa prices received favorable inflation guidance on Tuesday, they will have 2 more days to get through before near-term demand concerns can be soothed. Even with negative surprises today and tomorrow, cocoa prices should remain fairly well supported this week. While they remain at comparatively high levels both the November year-over-year readings for US CPI and core CPI results came in below trade forecasts, which provided more evidence of declining inflation which in turn gave a boost to cocoa’s near-term demand outlook. The cocoa market will have the latest UK CPI reading early in today’s action, but will also receive significant longer-term inflation guidance after the close with the FOMC’s quarterly projections having forecasts for PCE inflation and core PCE inflation covering the next 3 years. The ECB and BOE will have their central bank meetings early in Thursday’s trading, and their post-meeting commentary will certainly cover their respective inflation outlooks. If inflation continues to show evidence that it is in a longer-term decline, it will shore up demand for discretionary items such as chocolate.

COTTON

The cotton market has remained in a choppy consolidation pattern since early November. Outside market forces turned bullish and March cotton rallied sharply on Tuesday after first trading down to the lowest level since November 28. Lower than expected consumer inflation combined with a sharp break in the US dollar were seen as positive developments. Ideas that this could boost demand for cotton into the holiday season helped to support. Even with less inflation, consumer discretionary income is still pinched, and the longer-term demand factors look sluggish. Consumer price inflation came in well below expectations and this drove the stock market sharply higher. However, while the stock market managed to close higher, the close was well down from the highs, and it may take continued strong economic news in order to suspect much follow-through to the upside.

SUGAR

Sugar prices continue to move back and forth between both ends of their December consolidation zone, but they have been unable to climb above last week’s highs in spite of stronger energy prices and improving global risk sentiment. As a result, the sugar market remains vulnerable to a downside breakout move. A rally in crude oil and RBOB gasoline prices provided carryover support to the sugar market as they can help to strengthen near-term ethanol demand in Brazil and India. After early delays, this season’s Center-South sugar production has moved ahead of last season’s pace. With sugar’s share of crushing well above last year’s comparable level, 2022/23 production should come in well above the 2021/22 total. While low yields from this season’s early harvested cane could lead to a pullback in India’s sugar production, they are still expected to easily fill their first export tranche of 6 million tonnes.

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