Rally in Coffee Today?
An improved risk mood, stronger Brazilian currency, and the approaching end of the Brazilian harvest could support a rally in coffee today. Below normal rainfall over Brazil’s major Arabica growing region this summer has helped the harvest advance quickly, but it may also negatively impact next season’s output. On the other hand, favorable weather has boosted the outlook for the harvest in Colombia, which should start to pick up in the second half of September. The Brazilian real traded to its highest level in more than a week yesterday, which is also supportive to coffee on ideas it eases pressure on Brazilian growers to market their crop to foreign customers. Dealers have mentioned that the decline in prices last week slowed producer selling. Brazil’s Arabica harvest has seen its fastest pace in three seasons, and it is expected to finish within the next few weeks. Tuesday’s negative shift in global risk sentiment weakened coffee’s out-of-home demand outlook and weighed on prices late in the day, but sentiment appears to be better today with stronger equity markets in Asia overnight (except China) and higher openings expected in the US.
The cocoa market is under pressure this morning from sharp declines in the euro and the British pound in the wake of disappointing PMI readings that also point to recession. Lower currency values make it more expensive for European grinders to buy cocoa. On the other hand, Asian equity markets were higher overnight (except for China), and US markets are expected to open higher today, which may reduce the concern over chocolate demand that have pressured the cocoa market this week. There has been an increase in rainfall over West African growing areas in recent weeks that is seen as beneficial to the upcoming main crop, but the El Nino threat lingers. The ICCO has forecast a second global production deficit in a row for 2022/23, and El Nino has increased the chances for a third one in 2023/24. Heavy rainfall this summer has also raised concerns about swollen shoot disease, and inadequate pesticide and fertilizer usage have also raised concerns about upcoming production.
US cotton crop conditions are near record lows, and hot weather threatens to make them worse, but the market’s ability to rally off this news is limited by concerns over demand. Asian equity markets were stronger overnight except for China, which continues to be plagued by problems in its property sector. Another limiting factor is the dollar, which has reached its highest level since early June, as this makes US cotton exports less competitive on the global market. US exports have not been stellar. As of August 10 (per last week’s US export sales report), cumulative sales for the 2023/24 marketing year had reached 5.126 million bales, down from 7.368 million a year ago and the lowest since 2016/17. Monday’s Crop Progress report showed conditions worsening in the US and in Texas, with good/excellent percentages at or near record lows and poor/very poor at record highs. More hot and dry weather in the forecast does not offer much chance for improvement.
October sugar extended its downtrend overnight to trade to its lowest level since July 7, led by favorable harvest weather in Brazil and weaker crude and gasoline prices. Brazil’s major cane-growing regions have dry weather in the forecast through Friday, followed by light daily rainfall through the early part of next week. This should help minimize harvesting and crushing delays and keep their Center-South production ahead of last season’s pace. The Brazilian real rallied yesterday to its highest level in more than a week, which should support sugar on ideas it eases pressure on Brazil’s Center-South mills to produce sugar for export, this is offset by the weakness in crude oil. Reports this week that India’s monsoon rainfall has declined sharply this month brings home the idea that El Nino is going to pull Asian sugar production lower in 2023/24. The widely anticipated production deficit for the upcoming marketing year contrasts with the strong production out of Brazil and las led to a sharp decline in the October/March sugar spread.
Interested in more futures markets? Explore our Market Dashboards here.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.