Brazilian Sales Behind Average Pace

COFFEE

December coffee is closing in on a retest of the August and September lows. Rains are expected to reach to Brazil’s growing areas around Thursday, which will come as a relief after temperatures reach to 104 degrees F (20 degrees below normal) ahead of then. Extremely heat and dry conditions are expected to damage early flowering, and cooler and wetter weather will be welcome. The trade group Safras and Mercado said that Brazilian farmers had sold 47% of their 2023/24 Arabica production as of September 18 versus a five-year average of 51% for that date. Producers said the harvest was nearly complete. Sales running behind the average pace indicate ample supply and/or disappointing demand. ICE exchange coffee stocks were unchanged on Friday. There are 15,391 bags waiting to be graded, but stocks are down more than 43,000 from the end of August. Friday’s Commitments of Traders report showed managed money traders were net buyers of 14,200 contracts of coffee for the week ending September 19, reducing their net short to 16,361. This reduces the threat of heavy short covering, but we suspect the net short is much larger by now, as the market has sold off sharply since the 19th.

COCOA

The cocoa market has been dealing with the second straight global production deficit for 2022/23, and the onset of El Nino threatens to make it a third in a row. The selloff from the September 15 all-time highs has allowed the market to correct its overbought condition, but a risk off mood today could spark additional selling. El Nino registered an Oceanic Nino Index (ONI) of +1.1 during the June-August timeframe, the highest since February-April 2016, and the index is expected to climb well above those levels in the next few months. The latest projections from the US Climate Prediction Center give El Nino a 95% chance of lasting through March and a 77% chance for it to continue through May. Approximately 70% of global cocoa production comes from West Africa, which typically sees drier than normal conditions during El Nino events. The region has also seen outbreaks of black pod and swollen shoot diseases due to too much rain this summer and a lack of adequate fertilizer and pesticide usage. Of the other major cocoa producing nations, Indonesia has already experienced dry conditions. Another major producer, Ecuador, could see heavier than normal rainfall, which could also spark disease. These crop worries gain notoriety after two years of global production deficit.

COTTON

December cotton had had an outside day with a lower close on Friday, which is technically weak and suggests there could be more follow through selling. The Drought Monitor last week showed a modest decline in US cotton production in areas experiencing drought, which is small consolation with crop conditions hovering around record low levels. But in the face of lower production, traders are worried about demand, with exports at their lowest in several years and the strong dollar making US cotton more expensive on the world market. Traders are expecting China to look to Brazil and Australia for cotton this year after they were the leading buyers of US cotton this year. There have been reports recently that buyers in China are stockpiling Australian cotton in warehouses in anticipation of China lifting their ban on imports from that nation. The 6-10- and 8-14-day forecasts show above normal chances of rain in Texas, which could be supportive if rainfall is heavy, as that could damage open bolls. Mostly dry/light rain conditions are expected this week.

SUGAR

March sugar saw some mild pressure overnight, as a risk off mood took hold in Europe. The market has been in a coiling pattern with an upward bias and is not too far from the 12-year highs that it reached last week ago. It was undercut last week by declines in gasoline prices and the Brazilian real, but it continues to draw support from expectations for sharp declines in Asian production this coming year. India’s monsoon rainfall was running 6% below normal as of September 24, with only one week to go in the season. The trading firm Sucden said on Friday that sugar prices are likely to remain high, partly due to lower production in India. The are forecasting Indian production at 28.6 million tonnes in 2023/24. They estimate Brazil’s output at 40.4 million tonnes, up from 33.7 million a last year, with 2024/25 output seen at 42.07 million. China is expected to auction 126,700 tonnes of sugar from their state reserves on Wednesday. This would be their first state sugar reserve sale since 2016. Friday’s Commitments of Traders report showed managed money traders were net buyers of 10,832 contracts of sugar for the week ending September 19. This is near the upper end of the historic range, which leaves the market vulnerable to heavy selling if support levels are taken out.

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