Weaker Demand Tone for Cocoa
Until there is a more positive outlook for near-term demand, cocoa may have difficulty finding a near-term floor. Reports of increasing coronavirus cases that have led to fresh restrictions and “paused re-openings” in many areas of the world weighed on the cocoa market as it weakens the prospects for improved demand during the third quarter. While first quarter grindings totals for Europe and Asia came in better than forecasts, there is a growing consensus that Europe, Asia and North American second quarter grindings results will show year-over-year declines.
The market faced additional bearish supply news this week that has helped to take the market back to within close proximity to its June lows. A cold front over several major Arabica-growing regions in Brazil is not expected to reach freezing temperatures levels, and that led to some long liquidation. After that, there is warmer and drier weather forecast for the south Minas Gerais region through late next week, and that may further reduce the window for frost damage this year.
Corrective breaks are likely buying opportunities. December cotton traded to the highest level since March 6th as the market continued to build a weather premium on concerns about the Texas crop. The 6-10 and 8-14 day forecasts call for above average temperatures and below normal precipitation for west Texas looks. The harsh weather comes in the wake of last week’s Acreage report which showed a decline in planted area from the March 31st update. The weekly crop progress report showed improvement over the past week.
The market continues to be weighed down by a bearish global supply outlook. After reaching a new 2 1/2 week high, October sugar turned to the downside. Sharp production increases during the 2020/21 season remain on the cards for the world’s top 2 producing nations (Brazil and India). That remains a major source of pressure as those output increases will in turn lead to significant export increases that will offset a second season in a row with low exports from Thailand.
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