Coffee Near Positive Weekly Reversal
Coffee prices have remained within their late June/July consolidation and have had trouble sustaining upside momentum, but while the recent coiling pattern may lead to a retest of this week’s lows, the market is also within striking distance of having a positive weekly reversal. Colombia’s output has been slow to recover from the La Nina event that ended earlier this year, and their production is hovering around 9 1/2-year lows. Their output in June did came in 0.5% above last year, but the 12-month running total (July 2022-June 2023) was below 11 million bags for the third straight month. Brazil’s Arabica shipments in June were down 23% from a year ago. This was not entirely surprising given the slow start to harvest, but since mid-June, harvest conditions have been nearly ideal. With the Brazilian real strengthening against the dollar, producers have had less incentive to sell. Brazil’s largest co-op, Cooxupe, reported that its farmers had completed 50.5% of their harvest by July 14 versus 42.8% for the same period last year. This is their fastest harvest pace since 2020.
Cocoa’s main source of strength through this rally has been a bullish supply outlook that is likely to continue well into the 2023/24 season that starts in October, but demand has become a bigger concern in the wake of disappointing grind data this week. Yesterday, the Cocoa Association of Asia reported second quarter Asian grindings at 213,977 tonnes, 6.52% below the same period last year and below trade expectations. This was also the largest year-over-year percentage decline since the third quarter of 2020, which was in the early stages of the Covid pandemic. After the close yesterday, second quarter North American grindings came in at 102,493 tonnes, which was 11.6% below a year ago and well below the range of expectations calling for a 2-6% decline. This comes on top of lower-than-expected European grindings last week. The Asian numbers were particularly disappointing because the industry is looking for that region to be the main engine for global consumption. Sharp selloffs in the Euro and British Pound yesterday added to the pressure on cocoa. One counter argument to all this negative demand news in the improvement in the global economic outlook, given the easing in inflation data and the optimism that the interest rate hike cycle is coming to an end. There are concerns that the heavy rain in West Africa has led to outbreaks of black pod disease, and the arrival of El Nino could pose a threat to the upcoming main crop. Those concerns have increased now that the NWS has given an 81% chance of El Nino reaching moderate to strong intensity.
A decline in US cotton crop conditions last week and extreme heat in China and the US, the world’s two largest producers, has sent December cotton to its highest level since early March. There does not seem to be much relief in sight. This past Monday’s crop progress report showed a decline in US crop conditions, and it looks like they could be even worse this week. Yesterday’s weekly export sales report showed US cotton sales for the week ending July 13 at 67,050 bales for the 2022/23 (current) marketing year and 86,134 for 2023/24 for a total of 153,184. This was up from 74,070 the previous week but below the four-week average of 187,800. Cumulative sales for 2022/23 have reached 13.978 million bales, down from 15.705 million a year ago and the lowest for this point in the marketing year since 2015. Traders took some encouragement by the fact that China was the biggest buyer again last week. This comes in the wake of an announcement this week that the Chinese government was planning to release cotton supplies from the strategic reserve. Demand has been a concern, but things are looking up with the decline in inflation in the US and Europe and a growing consensus that the US will avoid a recession.
The rally in nearby RBOB (gasoline) to its highest level in over a year lends support to sugar on ideas it will strengthen ethanol demand in Brazil and India. This week it was reported that the Brazilian government is considering an increase the ethanol blending requirement to 30% from the current 27%, which if enacted would increase the incentive for Brazilian cane crushers to adjust their operations towards a larger share of ethanol at the expense of sugar. Updated forecasts for the El Nino weather event have it continuing through the North American winter, with an 81% chance of it reaching moderate to strong intensity. This could result in drier than normal conditions for India and Thailand and have a negative impact on 2023/24 production. Sugar’s demand outlook has improved with the more optimistic view towards the global economy, and the World Health Organization’s recent warning about aspartame favors sugar consumption. In the near term, Brazil’s Center-South cane-growing regions are expected to have mostly dry weather through late next week, which should minimize delays to harvesting and crushing and keep their sugar production well ahead of last season.
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