Cocoa Vulnerable to Short-Covering

COCOA

Cocoa’s near-term demand concerns will remain front and center issues for the market as long as high inflation levels and sluggish global risk sentiment dominate news headlines. Cocoa’s late-September rebound of 158 points from Monday’s 26-month low has been fueled largely by bullish supply developments that can help the market see upside follow-through early this week. Some short-covering has also been active. For the week, December cocoa finished with a gain of 107 points (up 4.8%) which was the first positive weekly result in 4 weeks as well as a positive weekly key reversal. The Ivory Coast Coffee and Cocoa Board (CCC) announced that the minimum farmgate price for their nation’s 2022/23 main crop cocoa production will be 900 CFA francs (roughly $1.34) per kilo, which compares to 825 CFA francs for last season’s main crop. Keep in mind that last Friday’s close for December futures was 246 points below their close on September 30th, 2021, so the CCC’s price increase may indicate that Ivory Coast cocoa supply may be tighter than expected during the fourth quarter.

COTTON

Global recessionary fears have been the key factor to drive the cotton market sharply lower over the past month, down about 26%. While the market fell to the lowest level since July 15 on Friday, open interest continues to advance and reached the highest level since April 13. Higher interest rates are likely to reduce consumers spending on apparel, while recent strength in the US dollar could curb the global appetite for US exports. The higher close Friday after making the new low from an extremely oversold condition might be a sign that at least a temporary technical recovery bounce may be in order. South and North Carolina produce about 7% of US cotton. With most of the crop not harvested and with open bolls, there could be significant damage from the hurricane. The global cotton surplus in the 2022-23 season is now seen at 452,000 tonnes, up from an August estimate of just 12,000 tonnes, according to Cotlook.

COFFEE

Coffee’s volatile price action during late September was unable to prevent the market from posting a second positive weekly result in a row. While the out-of-home demand outlook may be weakened by sluggish global risk sentiment, coffee continues to have bullish supply factors that can support prices. For the week, December coffee finished with a gain of 1.10 cents (up 0.5%). High inflation in many global economies will raise prices on many regularly bought items, and that normally results in a dropout in restaurant and retail shop business that is a significant portion of overall coffee consumption. However, a large portion of coffee consumption takes place at home which may be more resilient during economic turbulence. ICE exchange coffee stocks fell by 9,229 bags on Friday and finished September at 426,180, which was the lowest month-end total since April of 1999. Coffee positioning in the Commitments of Traders for the week ending September 27th showed Managed Money traders were net long 37,932 contracts after increasing their already long position by 3,267 contracts.

SUGAR

While it has avoided a sharp downside move since late July, sugar has had trouble sustaining any recovery move since reaching a 2022 high in April as it held in a tight range from mid-August to mid-September and seen coiling action over the past two weeks. For the week, March sugar finished with a gain of 4 ticks (up 0.2%). While a modest recovery in the Brazilian currency provided sugar with carryover support, crude oil and RBOB gasoline prices had sharp selloffs that pressured sugar prices down into negative territory late in the day. A delayed start to harvesting and crushing and the impact of the La Nina weather event left Brazil’s Center-South sugar production 8.4% behind last year’s pace by mid-September.

Brazil’s government put a cap on state fuel taxes, which reduced ethanol’s price advantage to gasoline and weakened demand. Center-South mills have shifted the crushing activities towards sugar production and from ethanol over the past few months, and sugar production forecasts have been revised upward. India is ramping up its ethanol production, but their 2022/23 sugar production should come in close to last season’s record high. This could increase pressure on India’s government to raise their 2022/23 sugar export limit which is currently at 8 million tonnes. Thailand’s production outlook continues to improve after experiencing back-to-back droughts in 2019/20 and 2020/21, with most of that output increase likely be diverted towards exports.