Coffee Supply Outlook Still Supportive
While bearish news from Brazil triggered a sharp selloff, the overall supply outlook remains supportive. December coffee broke out to the downside and reached a 2-month low. The Brazilian trade group Cecafe reported that Brazil’s September Arabica exports came in at 2.93 million bags which was 18% above last year’s total. Brazil’s harvest is nearly complete, so it may be difficult for upcoming monthly export totals to beat last year’s amounts by such a wide margin. The Brazilian currency remains close to a 1-week low following Tuesday’s sharp selloff, which put additional pressure on the coffee market as extended currency weakness will encourage Brazil’s farmers to market their near-term supply to foreign customers. Heavy rains are in the forecast for Vietnam’s Central Highlands which may disrupt coffee harvest and could prevent beans from turning ripe and ready for harvest.
A higher than expected reading for US PPI reinforced ideas that inflation levels will remain stubbornly high, which was a significant source of pressure for cocoa as chocolate is a discretionary purchase item for many consumers. There was also additional long liquidation in front of third quarter European grindings data released by the European Cocoa Association (ECA) this morning. Although it finished September with a mild recovery move, the Eurocurrency reached a 20-year low during the third quarter which will have made it more difficult for Euro zone grinders to acquire supplies.
The market was clearly disappointed with the USDA supply demand report. US cotton production came in at 13.81 million bales versus an average trade expectation of 13.34 million and a range of expectations from 12.80 to 13.65 million. This was virtually unchanged from the 13.83 million reported in September report. US endings stocks came in at 2.80 million bales versus an average expectation of 2.46 million (range 2.07-2.93 million) and up from 2.70 million in September. World ending stocks came in at 87.87 million bales versus expectations around 84.64 million (range 84.20-85.15 million) and 84.75 million in September. US and world ending stocks increased from September instead of falling as expected.
From an overbought condition, the market acts like a near term peak is in place. March sugar managed to hit key resistance at 18.92, and the lower close is a bearish technical development. The latest Unica supply report showed Brazil’s Center-South cane crush and sugar production were well below trade forecasts and this continued to provide the market with support. A major factor with those results was heavy rainfall that delayed harvesting and crushing that should benefit their late-harvesting cane crop. In addition, a sizable pullback in crude oil and RBOB gasoline prices put carryover pressure on the sugar market late in the day. The USDA’s latest WASDE report raised their 2022/23 US sugar stocks usage from 13.5 up to 14.8 as the USDA allowed for tariff-rate quota imports for the 2021/22 season to be extended through December. As a result, their forecast for 2022/23 US sugar imports was raised from 3.48 up to 3.61 million tons (3.275 million tonnes).
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