Strong Brazil Coffee Crop
Coffee is showing early signs that a near-term low may be close at hand. Brazil’s production is strong, but Colombia’s is struggling to recover from La Nina. The market had a downbeat finish to the second quarter, falling 31.35 cents in (-16.4%) in just over three weeks, and it finished last week with a loss of 5.85 cents (down 3.6%). Dry weather has helped the Brazilian harvest catch up after earlier delays. Their 2023/24 Arabica harvest reached 35% complete as of June 27, according to the consultancy Safras & Mercado. This was up from 31% last year but below the five-year average of 50%. The growing areas also have not experienced any very cold temperatures that would cause frost damage to the trees, and this is beneficial to the upcoming crop. Colombia, the world’s second-largest Arabica producer, has seen little improvement in its output since the end of La Nina earlier this year. La Nina brought heavier than normal rainfall that damaged trees and caused flooding, and many had expected their production to see a bigger recovery once it was over. The production total from June 2022 through May 2023 was 10.771 million bags, which was their lowest 12-month total since November 2013. It was down 11% from the comparable period last year (June 2021-May 2022) and 22% below the June 2020-May 2021 total.
September cocoa reached another new contract (and 7 1/2-year) high on Friday, but the whipsaw action of the past three sessions could be an indicator that a near-term top is close at hand. Heavy rainfall in West Africa has been one of the driving forces for the rally, as it has interrupted harvest and delayed transportation to market, but the forecast shows the possibility that rain could lighten up this week. The forecast for Abidjan, Ivory Coast has rain in the forecast for five out of the next seven days, but only two of those have a greater than 50% chance. September cocoa finished last week with a gain of 150 points (up 4.7%), for the fourth positive week out of the past five. Friday’s key inflation readings (Euro zone CPI, French CPI and US core PCE) all came in lower than trade forecasts, which improved risk attitudes and eased demand concerns for cocoa. Rallies in the Euro and British pound provided additional support, as that puts European grinders in a better position buy cocoa. The buying trend is supportive, but the large net long does leave the market vulnerable to heavy selling if support levels are taken out.
US cotton planted area was revised lower in Friday’s Acreage report, and this suggests the US cotton endings stocks/usage ratio could be the tightest in three years. Plugging the new planted acreage into the supply/demand balance sheet would put US 2023/24 production at 16.24 million bales versus 16.5 million in the June 9 USDA supply/demand report and 14.47 million last year. The stocks/usage ratio would fall to 20.0% versus 21.6% on June 9, 21.3% in 2022/23, and it would be the tightest since 2020/21’s 16.8%. A key reversal and lower close in the June Dollar Index on Friday could be bullish to cotton if it proves to be the beginning of a selloff for the dollar. Last week’s US Drought Monitor showed 18% of the US cotton production was in an area experiencing drought as of June 27, up from 16% the previous week. This is the first time conditions have not improved or held steady since March 21, but back then the area under drought was 46%. The 6-10- and 8-14-day forecasts call for much above normal temperatures and normal to below normal chances of precipitation in West Texas, which could limit any further improvement. The India Meteorological Department announced that their nation’s June monsoon rainfall total was 87% of their longer-term average, but they also forecast rainfall to be in the “normal” category this month, which would benefit the 2023/24 crop.
The sugar market has gotten oversold after its steep selloff, but a strong Brazilian crop and an improved outlook for India could limit a recovery move. October sugar pivoted to the upside early on Friday after a seven-day selloff that took the market to its lowest level since April 5. The expiring ICE July sugar contract received roughly 412,000 deliveries against it, which is a small for July. This lent support to the market as it indicated stronger demand. Three-day rallies in crude oil and gasoline may have also lent support on ideas it would help demand for ethanol in Brazil and India. However, late on Friday, Brazil’s major energy company Petrobras announced that it would cut its wholesale gasoline prices by 5.3%, which seemed to undercut that notion. The Brazilian currency recovered on Friday, which was also viewed as supportive to sugar on ideas it would ease pressure on Brazilian mills to produce sugar for export. The India Meteorological Department announced that their nation’s June monsoon rainfall total was 87% of their longer-term average, but they also forecast rainfall to be in the “normal” category this month, which would benefit the 2023/24 crop and help growers plant for 2024/25.
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.