Ongoing Cocoa Demand Destruction

COCOA

With a measure of chart failure early today the bearish track in Cocoa is extended into another trading session. Fortunately for the bull camp the new low for the move has been partially rejected and this week’s downward track has not attracted increased trading activity or a bump up in open interest! Fortunately for the bull camp, the net spec and fund long in cocoa has dropped from 90,000 contracts to 20,000 contracts recently and that could serve to slow upcoming declines and perhaps result in value surfacing above $6000 basis the September Cocoa contract. However, near term consolidation low support of $6677 in the September Cocoa contract is unlikely to hold as sentiment in the market is largely embracing a normalization of global production ahead after historical shortages last year. On the other hand, production from Indonesia remains under pressure from the residual impacts of El Niño with the production setback the worst since 2019 and growing conditions in West Africa continue to leave some supply uncertainty in place. Unfortunately for the bull camp Indonesia accounts for only 3.5% of total world supply and the market is aware of their eroding production which has declined by roughly 8.3% annually last several years. Currently, Ivory Coast conditions are conducive to good crop development with pod surveys favor the bear camp.  In a minimal supply side supportive development US Cocoa inventories declined by 19,727 tons and reached the lowest level in 15 months. From the demand side of the equation a large global chocolate maker expects demand destruction from high prices to surface with that company seeing its share prices come under noted pressure yesterday because of the negative demand outlook. Fortunately for the bull camp global grind numbers this week were largely supportive with strong gains in US and European demand offsetting a 1.4% decline in Asian demand.

COFFEE

With the recent break down in September coffee prices forged on increased volume and open interest the bias of the trade favors the bear. However, there are residual concerns of Brazilian supply losses from below normal rainfall earlier this month but those concerns are heavily offset by the lack of frost threats in current forecasts. Nonetheless, Brazilian output estimates have been reduced likely tempering aggressive selling until precipitation levels and frost prospects are known next week. While not top of mind in the market, extreme heat throughout Southeast Asia and the remnants of El Niño could periodically provide support to prices against what we see as a developing downtrend.

COTTON

While December cotton has managed a noted bounce off this week’s new contract low, the technical and fundamental outlook remain squarely in the bear camp. In fact, net cancellations in this week’s export sales of 74,200 metric tons suggests that bargain-hunting/strong export demand might have paused with traders thinking even lower pricing will be offered ahead. Despite lingering concerns for Texas production, crop conditions overall remain very robust and rains in production areas to the east of Texas should end production concerns there. Obviously, demand concerns from Asia remain fixed in the trade and with dissipating US production concerns the bear camp is likely to push prices into fresh contract lows next week. Even the macro impact on cotton demand is bearish with global equity market sentiment breaking down recently, US slowing signs, the dollar showing periodic strength, and the Chinese economy not responding to stimulus. The Export Sales Report showed that for the week ending July 18, net cotton sales came in at -74,207 bales (cancelations) for the current marketing year and 285,874 for the next marketing year for a total of 211,667. Cumulative sales have reached 111.9% of the USDA forecast for the 2023/2024 marketing year versus a 5 year average of 113.9%.

SUGAR

While the sugar market exploded yesterday, made a higher high early today and approached downtrend channel resistance lines we do not see the trend shifting upward. In fact, with the net spec and fund positioning jumping back into a net long territory and 67,000 contracts last week there would not appear to be pent-up stop loss buying capacity. However, a brokerage forecast predicting a narrower global sugar surplus of 1.2 million metric tons versus an earlier forecast of 4.6 million metric tons provides the bull camp with a temporary edge. Unfortunately for the bull camp the latest market demand forecast predicts global consumption will decline by 1%. Furthermore, other market forecasts from major sugar commercial traders still expect a bigger than previously expected surplus.

Interested in more futures markets?  Explore our Market Dashboards here.