Gasoline Rally Lifts Sugar
October sugar is back inside the heavy consolidation area from April through June, and the market looks well positioned to test the June high of 26.19 and possibly the April contract high at 26.43. The rally in RBOB (gasoline) futures to their highest level since June 2022 lends support to sugar on ideas it will strengthen ethanol demand in Brazil and India. Last week there was a report that the Brazilian government was considering an increase the ethanol blending requirement to 30% from the current 27%. This would provide an incentive for Brazilian cane crushers to produce adjust their operation to produce more ethanol at the expense of sugar, and there are some estimates that it could reduce 2024/25 sugar output by more than 3 million tonnes. Unica is expected to release a supply report this week that will cover Brazilian Center-South production for the first half of July. The lack of weather delays during that time frame suggests harvesting and crushing were close to full speed. The increase in energy prices this month may have encouraged crushers to increase ethanol’s share.
The cocoa market has looked past disappointing demand second quarter grindings in Europe, Asia, and North America to focus on the bullish supply setup. Earlier this month, Ivory Coast suspended forward sales of next season’s cocoa production to foreign customers but allowed sales to domestic processors. Ivory Coast officials took this step on concerns they would not be able to meet delivery on any additional exports, blaming the spread of black pod that sparked by recent heavy rains last month and worries that El Nino will bring dry conditions later this year that will affect upcoming crops. The suspension may also be from the growth in domestic “origin” grinding, which leaves fewer beans available for export. This also suggests the reason for the recent smaller grind numbers is short supply, not lower demand. If the suspension stays in place, it will have a significant impact on Ivory Coast bean exports and force buyers to look elsewhere for their 2023/24 bean supplies.
There are reports that the recent decline in coffee prices in Brazil is prompting growers in Brazil to hold back sales. The main source of pressure since April has been the outlook for a stronger Brazilian crop, but with Colombian production issues and an improving global demand outlook, the market may have gotten undervalued. Dry weather since mid-June has allowed the Brazilian harvest to move at a swift pace, but it is still running behind average. Like Brazil, Colombia’s output was negatively impacted by the La Nina event that ended earlier this year, but their crop has not recovered to the extent that Brazil’s has, and it is hovering around 9 1/2-year lows. Their production in June did climb 0.5% from a year ago, but the 12-month running total (July 2022-June 2023) at 10.776 million bags marked the third month in a row that it was below 11 million. This is the first time this has occurred since October-December 2013. Global coffee consumption at restaurants and retail shops was weakened by high inflation, but the improvement in the CPI readings for many major economies bodes well for consumer spending.
December cotton had a wild day on Friday, trading to its highest level since February and then falling back below Thursday’s low before settling in middle of the day’s range. News that China will issue 750,000 tonnes in sliding tariff rate cotton import quotas to non-state-run firms sparked heavy buying by speculators. But expectation that most of the cotton purchased would come from Brazil sparked selling. The document announcing the tariffs did not specify when the quotas will be issued. At the high, the market had rallied 5.6% on the week and 12% from the low on June 27, and traders may have been anxious to take profits. Extreme heat in China’s Xinjiang region and in the southwestern US and Texas have growers concerned about the crops, but some relief could be coming next week. The 1-7 day forecast calls for above normal temperatures and below normal precipitation across Texas, but the 6-10 day has a normal chance of rain and the 8-14 day has an above-normal chance. Last week’s Crop Progress report showed a decline in crop conditions, and it looks like there could be another decline this afternoon after the hot and dry weather in west Texas.
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