Pressure on the Cotton Market

COTTON

While March Cotton continues to hold above the mid-December and early-January twin lows, there is not an apparent bullish argument to suggest the market will hold consolidation low support at 67.50. In fact, outside market pressures of a stronger Dollar and a sharp setback in soybean prices leaves pressure on the cotton market, as the dollar leaves US cotton at a disadvantage in the global export marketplace and continued weakness in soybean prices could encourage US farmers to plant more cotton than beans during the 2025/26 season. Fortunately for the bull camp, net spec and fund traders held a moderately large net short of moderate 30,749 contracts at the end of the year and the net short was probably built up in the early days of 2025.

COCOA

While some of the sharp recovery off the massive spike down move yesterday could be attributable to balancing an overdone selloff event, the ability to sustain a reversal of $1200 in a matter of hours suggests more than a simple mechanical event. On the other hand, the potential for exchange policy changes to curtail volatility may have temporarily spooked the trade prompting the one-off washout. In fact, with the weather forecasts unchanged and calling for mostly dry and above normal temperatures for Africa tempered by scattered showers in some portions of East Africa and Bahia Brazil the strong recovery rally must have originated from a source other than weather. While reports that Hershey is soliciting regulators for the capacity to buy large blocks of cocoa are bullish on their face, seeing Hershey indicate they are “well covered” for 2025 needs should temper the newfound bullishness. Apparently, Hershey is asking for the CFTC’s help with purchasing 90,000 tonnes of cocoa beans from ICE exchange cocoa stocks, which is a much larger quantity than currently allowed. If they are successful, it will allow chocolate makers in North America and Europe to acquire large amounts of cocoa quickly and could relieve near-term supply tightness for end-users. To a lesser degree the market might have been psychologically stimulated by news from a Dow Jones article indicating cocoa farmers were uprooting their plants to increase future yields as the cost structure requires extremely high selling prices to produce a living from the crop. It is also possible that the Dow Jones article suggesting some cocoa farmers will switch to palm oil (which is reportedly more profitable) keeps fears of deficits alive into future crop cycles. ICE Europe lowered the contract threshold for cocoa’s accountability level, which will impact large speculative traders and could lead to a wave of long liquidation in the London Cocoa contract over the next few sessions. In a headline that could initially be viewed as bearish Ghana purchases have reportedly reached 366,075 tons as of December 12^th versus only 232,115 tons last year. However, last week traders estimated beans smuggled from the Ivory Coast into Ghana were at least 50,000 tons and that tempers the hope of greater supply from Ghana.

COFFEE 

We see the coffee charts as bearish (a preponderance of lower highs and lower lows since the December high) with the prevailing trend pointing down. However, while short-term stochastics have registered a buy signal, yesterday’s range down breakout was forged on a surge in trading volume giving the bear’s a technical edge going forward. Furthermore, there is daily rainfall in the forecast for Brazil’s major Arabica-growing regions through late next week, which will provide some relief from last year’s drought conditions. In another negative supply development Colombia’s December coffee production was 1.798 million bags, which was a 47% increase over their December 2023 production. While this was a slight increase over their November output (1.761 million bags), they are now Colombia’s two highest monthly production totals since January 1996. Colombia’s 2024 full-year coffee production was 13.997 million bags, which compares to 11.347 million in 2023. This was Colombia’s largest production total for a calendar year since 2019, and the highest 12-month production total since April 2021. In an age old debate, a scientific study has been released from the UK and has apparently “proved” again that coffee is beneficial to health and can contribute to longer lifespan especially if consumed in the morning.

SUGAR

Despite nearly an 8% annual decline last year, and a noted liquidation of the noncommercial and nonreportable spec long underway, fresh and significant damage on the charts this morning projects March sugar down to the next key support level of 18.74. In retrospect, March Sugar was unable to sustain early strength yesterday as it came under late pressure and fell to a 1-week low to finish Wednesday with a moderate loss. Therefore, the technical bias remains down with very high open interest capable of feeding a wave of sellers. The fundamentals are also bearish with recent rainfall expected to improve the prospects for Brazil’s Center-South 2025/26 cane crop, and that should add to the bearish environment. Furthermore, a pullback in crude oil and RBOB prices provides carryover pressure on the sugar market as that could weaken near-term ethanol demand.

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