Coffee Extends Coiling Price Action

COFFEE 

March coffee extended January’s tight coiling price action yesterday but it appears the coiling pattern has a slight downward tilt. Granted some short-term technical signals have produced buy signals this week but those signals aren’t strong. Furthermore, the most recent net spec and fund long in coffee was very burdensome at 64,577 contracts (the record net spec and fund long was 79,584 contracts in April of last year) and therefore a failure of consolidation low support at 312.15 could result in a spike lower trade like the washout seen on November 29th through December 3^rd which resulted in a break of nearly 12% in three sessions. However, with next week’s rainfall over Brazil’s major Arabica growing regions potentially heavier than normal there could be damage to coffee trees. In contrast, Vietnam’s Central Highlands growing region has dry weather and high temperatures in the forecast through the end of next week. Drier conditions should help their coffee harvesting and bean drying make up delays from wet weather over the past month.

COTTON

Like other soft commodity markets, the cotton trade has continued to coil with a slight track lower. In fact, yesterday March Cotton was unable to hold onto early support and came under pressure through midsession, before managing a modest recovery late in the day to finish Thursday’s outside-day session with a moderate gain. Short-term stochastics continue to present buy signals, but the signals are not strong in comparison to the mid-December buy signal which preceded a two-day low to high bounce of two cents. The USDA’s latest Supply/Demand report comes out at midsession. A Bloomberg survey has an average forecast for US 2024/25 cotton production to come in at 14.16 million bales, which compares to 14.26 million in the December WASDE report. The Bloomberg survey’s average estimate for global 2024/25 cotton production is 117.33 million bales, which compares to 117.39 million in the December WASDE report.

COCOA

Despite the lack of definitive direction, cocoa prices have shown significant volatility with this week’s trading range of $1,223, highlighting a market attempting to factor in a historically tight market which has shown little demand destruction. In retrospect, the International Cocoa Organization pegged the 2023/2024 season to have posted the lowest stocks to usage ratio of the last 40 years at 27% and that combines with signs that the world’s largest production area (West Africa) will continue to face production issues, some of which are long-term (like the replacement of trees). However, a major European confectionery thinks there is the potential for a global cocoa market surplus in the 2024/2025 season apparently discounting tree diseases, inadequate investment in the crop and a crumbling infrastructure to handle the crops in West Africa. Surprisingly, the tripling of raw cocoa prices last year has yet to “up end” demand, but trade sources predict chocolate manufacturers will be forced to implement 50% price increases. It should be noted that Ivory Coast arrivals for the 2024/2025 season are up 27% as of January 5th. Therefore, both Ivory Coast and Ghana arrivals are stronger than last year and that has likely put a lid on prices this week. Ghana’s official cocoa purchases this season through December 12th was 366,075 tonnes which is 57% higher than the comparable period last season. Although Ghana’s 2023/24 production was a multi-decade low, the rebound in cocoa output this season may keep further price gains in check. Hershey’s attempt to purchase 90,000 tonnes of cocoa from ICE exchange cocoa stocks may not be approved by the CFTC as it is far larger than current regulations allow and as it would severely reduce overall cocoa exchange stocks. It also may reflect low near-term supply at Hershey, and that might have contributed to a turnaround in cocoa prices from Wednesday’s downside breakout.

SUGAR

While March Sugar fell to a new 4-month low early yesterday, the market rejected the downside breakout and closed back above the 19.00 level in a fashion suggesting that price level remains a key pivot point. Fortunately for the bull camp, the noncommercial and nonreportable net long position has come down significantly (from 147,000 contracts in the late September to only 35,000 contracts last week) and into the low yesterday March sugar was trading 40 ticks below the level where the COT report was measured likely reducing the spec long further. Unfortunately for the bull camp Commodity Index traders are long of 227,261 contracts, which clearly leaves the market vulnerable to aggressive long liquidation selling. Adding to the negative bias are Brazilian forecasts of daily rainfall starting on Sunday and extending for most of next week. This rainfall should benefit the Brazil Center-South 2025/26 cane crop, and that has been a key source behind this week’s selling interest. The Brazilian currency made a 3 1/2 week high on Thursday, which eased pressure on Center-South mills to produce sugar for exports and helped to fuel the late rebound.

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