Sharp Downside Turn for Coffee

COFFEE

After extending its recovery move to a 4-week high, March coffee turned sharply to the downside yesterday and this is a bearish technical development. The Brazilian currency reached a new 3-week high which provided coffee with early carryover support. The turning point came from comments from the head of Colombia’s coffee growers federation who said that next season’s Brazilian production is going to be “strong” and would create a global surplus. While those comments were made to justify Colombia setting a fixed price for their coffee, they triggered a wave of profit-taking and additional long liquidation. Keep in mind that Brazil’s 2023/24 Arabica production will be an “off-year” crop that normally comes in below the previous season’s output. In addition, the current La Nina weather event is expected to have a negative impact on coffee trees in Brazil and Colombia until the end of first quarter. ICE exchange coffee stocks increased by 13,402 bags on Thursday and have climbed back above the 600,000 bag level for the first time since mid-September. Coffee waiting to be graded fell by over 23,000 bags, however, which indicate the potential near-term “top” for ICE exchange coffee stocks continues to be dialed back. Coaster Rica exports for the month of November were down 43% from last year.

COCOA

The cocoa market is finally finding some relief on the demand front as inflation gauges in many developed economies start to fall back from 40-year highs. With questions over this season’s West African output, cocoa prices may be heading for a retest of the mid-November highs. The latest reading for Euro zone CPI showed a “double-digit” year-over-year rate but was their first downtick since June 2021 and the largest monthly decline (0.6%) since November 2008. The surge in inflation since early last year has resulted in much higher cost for regularly purchased items and as a result, has led to consumers pulling back on discretionary purchases such as chocolate. Wednesday’s quarterly ICCO supply/demand update continued to underpin cocoa prices as it projected a record high global supply deficit for last season. While that may be “old news”, the likelihood of a sizable increase in global production from last season has been reduced by a lack of adequate fertilizer and pesticide use in West Africa.

COTTON

March cotton failed to close above stiff resistance at 85.17, and this leaves the market vulnerable to more consolidation or even a resumption of the downtrend. The market has serious global demand issues, especially if a more recessionary tone develops. It is a mixed bag for the economic outlook right now with plenty of optimism out there regarding a soft landing for many countries. The China economy looks especially troublesome, and the European economy may already struggle as their economy absorbs high energy costs. If export sales continue to slow, and global apparel sales drop off noticeably, the cotton pipeline will fill which could force values lower.  Cumulative sales for 2022/23 have reached 8.701 million bales, down from 9.345 million a year ago and the lowest since 2016/17. The five-year average is 9.790 million. However, sales have reached 72% of the USDA forecast for the marketing year versus a five-year average of 68%. The largest buyer this week was India at 5,744 bales, followed by Indonesia at 4,212 and Pakistan at 6,520.

SUGAR

Sugar prices remain on-course for a positive weekly reversal, but were unable to extend this week’s recovery move in spite of carryover support from key outside markets. With the market still looking at a bearish longer-term supply outlook, sugar remains vulnerable to selling pressures. Although it found early support from a 3-week high in the Brazilian currency, a pullback in RBOB gasoline prices from a 1-week high weighed on the sugar market as that may dampen near-term ethanol demand prospects. Continued rainfall over Brazil’s Center-South cane-growing regions has underpinned sugar prices this week as that is likely to create further delays with this season’s Center-South harvesting and crushing. Brazil sugar exports for the month of November reached 4.074 million tons, up sharply from 2.662 million last year. After this season’s early delays, 2022/23 Center-South sugar production remains on-track for a moderate increase from last season’s output total. Even with an increase in their ethanol production, India’s 2022/23 sugar output may exceed last season and reach a record high total. While crude oil and RBOB gasoline are well above last week’s lows, they remain far below price levels that would encourage Center-South mills to shift a large portion of crushing from sugar to ethanol production.

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