Coffee Recovery Gains Attention

COFFEE

With a test and definitive rejection of the $260 level yesterday it is possible September coffee has found a value zone! However, the coffee market remains in a large downtrend channel pattern and will need more conclusive evidence of supply threats from El Niño to extend the June recovery into a full-blown reversal/bull market environment. Historically, the most significant production impact from El Niño has been in Asia in the form of dryness in Vietnam and Indonesia which have become significant contributors to world coffee supply over the last decade.

SUGAR

With a gap down failure and decline to the lowest level since February, the sugar charts have shifted from bearish to extremely bearish. Obviously, seeing the revival of the Indian monsoon has deflated added to bearish sentiment in place over the last two months. Surprisingly, the trade has apparently discounted the threat against European sugar beet production from extreme/record heat, and the market has also discounted news that Brazilian sugar output declined by 25.6% in the second half of May as sugar mills continue to crush for ethanol given the impact of the war on global fuel prices. In our opinion, the ebb and flow of El Niño/monsoon sentiment will become significant unless rainfall in India maintains normal or above normal levels in the coming weeks. In other words, volatility in the sugar market is likely to expand but continued declines in oil prices and wet weather forecasts from India is likely to send sugar prices to multiyear lows.

COCOA

With cocoa prices approaching two month highs and outside market forces shifting negative, the risk to longs is on the rise. In fact, aggressive gains over the last five trading sessions (on significant trading volume) resulted in declining open interest, which could suggest a portion of the trade is balking at current price levels. However, it should be noted that recent small spec and fund positioning in cocoa is hovering near record short positioning which by itself creates the potential for a massive supply side speculative driven rally.

COTTON

Like other soft commodity markets, the cotton market has forged an initial El Niño type of rally. However, the recent cotton rally is at least partially the result of the fear of dryness in US production areas and the prospect that tight fertilizer supply/high fertilizer prices will trim US output. Unfortunately for the bull camp in cotton outside market forces (namely an exploding dollar and declining oil prices) have stepped into deflate the impact of US supply concerns and we suspect sharp declines in oil prices have contributed to the recent reversal in cotton. While weekly planting progress readings showed 15 states at 92 registering below the five-year average of 94 the reading remains well above the two previous years. Cotton squaring in 15 states came in above the five year average and above the two previous years. Another minor negative for cotton are signs that the Indian monsoon has revived!

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