Sharp Reversal In Cotton

COTTON

December cotton staged a sharp reversal yesterday, as a stronger dollar and weaker export sales report stopped a month-long rally. At the high yesterday the market had climbed 11.58 cents (15%) off its June 27 low, likely overdone on the heat/drought/crop worries theme. The September dollar index rallied sharply, which makes US exports more expensive on the world market. The weekly export sales report showed US cotton sales for the week ending July 20 with net cancellations of 18,665 bales for the 2022/23 (current) marketing year and net sales of 80,553 for 2023/24 for an overall net of 61,888. This was down from 153,184 the previous week and the lowest since March 2. The largest buyer was China at 66,047 bales. The weekly US Drought Monitor showed 20% of US cotton production was in an area under drought, up from 17% the previous week and the highest it had been since May 30, when it reached 28%. The low this year was 15% on July 11. Last year’s drought not only encompassed the entire state of Texas and Oklahoma; it also included a good portion of the Delta. The current forecast calls for no significant rain through Wednesday across Texas. There are chances of scattered showers and thunderstorms daily for August 3-11, with daily totals anywhere from 0.05-0.4 inches. The rains will be disorganized and could evaporate quickly, with daily high temps ranging from the 90s to as high as 107. This should keep the crop under stress at least through the middle of next week.

COCOA

Cocoa’s supply outlook remains bullish, with heavy West African rainfall restricting near-term supply and El Nino threatening to have a negative impact on production for the 2023/24 season. Moderate to high rainfall is expected across the West African cocoa areas over the next 10 days, increasing the chance for more flooding. It also adds to concerns about black pod disease and swollen shoot disease. September cocoa had a disappointing close yesterday after trading to another new contract high. The turning point came from huge post-ECB meeting selloffs in the Euro and British Pound, as the weaker currencies would make it more difficult for European grinders buyers to buy cocoa. Europe is the largest region for cocoa processing. Hershey raised its full-year adjusted profit forecast, marking another strong performance by a major chocolate maker, which shows the durability of demand in the face of higher prices. Prices at 12-year highs along with a very large net long position held by speculators leaves the market vulnerable to a pullback if support levels are taken out.

COFFEE

Safras and Mercado reported Brazil’s 2023/24 harvest was 74% complete on July 25 versus a five-year average of 79% and 75% a year ago. The arabica harvest was 65% complete versus 71% on average and 66% a year ago. They pointed out that the larger crop this year accounts for the slower pace. More dry weather is forecast for Brazil’s major arabica growing regions, which should minimize harvest delays. There have been reports of Brazilian coffee growers being reluctant to sell their newly harvested crop because of low prices, and the stronger Brazilian currency eases pressure on them to sell. Brazilian growers report that their trees look healthy and that the 2024 crop looks promising, but there are concerns that El Nino could bring early and frequent second-half rains that could hurt the quality of the new crop. ICE exchange coffee stock rose by 275 bags on Thursday, all of which were approved at their New Orleans facilities.

SUGAR

Dry weather is expected to continue for Brazil’s Center-South region through next week, which will support strong harvest and crushing activity. However, the strengthening Brazilian real eases pressure on Center-South mills to produce sugar for export, and high gasoline prices could boost ethanol demand in Brazil and India, which would also encourage mills to shift the crushing mix towards more ethanol and less sugar. StoneX has forecast 2023/24 Center-South sugar production at 38.3 million tonnes, up 13.9% from 2022/23, with the cane crush increasing 11.1% and ethanol production by 8.6%. They are also projecting a global supply surplus of 0.3 million tonnes versus 1.4 million in 2022/23. There are concerns that El Nino will reduce sugar production in Thailand and India in 2023/24.

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