Cotton Downtrend Extends into 2025

COTTON

While cotton managed a recovery bounce in the waning days of 2024, the downtrend looks to extend into 2025. However, the net spec and fund positioning in cotton registered a net long of only 29,060 contracts last week, suggesting the market has priced significant bearish prospects already. However, the most recent drought monitor map show current severe drought areas at the beginning of last year to have largely dissipated except for a very narrow band through the middle/eastern portion of Tennessee. Last January saw almost all of Tennessee, the Southeast portion of Arkansas and nearly all of Louisiana in extreme drought. Therefore, weather and the charts leave favor with the bear camp. Front-month cotton futures finished 2024 with an annual loss of 15% and a third year in a row with a negative result but that probably won’t entice managed money, funds and specs into the long side as the US stocks to use ratio (without dry weather) is likely to reach the highest level since 2019. Furthermore, the Dollar will start the new year at its highest valuation since late 2022, and that will make US cotton less competitive in the global export marketplace. In the end, the world supply and demand situation has basically tracked sideways for three years and should be considered nearer the tight end of the range since 2010.

COFFEE 

With the aggressive range down new low for the move and noted recovery trade on Tuesday, a gap higher trade this morning should put the bull camp back in firm control. While the most recent net spec and fund long of 66,868 contracts is burdensome, a trend of long liquidation since the beginning of May should leave the market with a decent measure of speculative buying capacity. However, the rally is viewed as suspect by some traders given ongoing heavier than usual Brazilian rains are improving output prospects. In fact, Brazil’s largest arabica growing area last week saw precipitation at a startling 182% of normal with 102 millimeters soaking the crop. Obviously, supply issues from Vietnam propelled the 2024 rally but analysts do not expect supply to keep pace with demand again in 2025 as demand has not wavered in the face of unheard of 50 year price highs! From a technical perspective, March Coffee put together a sizable recovery move from a 3 1/2 week low at midsession Tuesday, but the market still finished the year with a fourth straight negative daily result. Starting tomorrow, Brazil’s key Arabica-growing region will have daily rainfall through the end of next week with the heaviest amounts falling on Friday and Saturday. Extended dry conditions last year will have a longer-term negative impact on the region’s coffee trees, but they have found some relief from precipitation that has fallen over the past few weeks. With the Arabica harvest not reaching full speed until May, the 2025/26 crop should see some improvement. Colombia’s 12-month production totals have climbed back above the 13 million bag level, and that will also weigh on coffee prices. With upcoming rainfall expected to improve Brazil’s upcoming crop, coffee prices will probably extend the December pullback.

COCOA

Despite the lack of a higher-high early today, the cocoa market remains in a bullish chart setup. In fact, yesterday March Cocoa was able to rebound from early noted pressure and as a result, front-month cocoa futures were able to finish 2024 with a gain of 178% which was by far the best annual performance by any Ag commodity. Even with last week’s sizable pullback, huge gains for the quarter and for the full year could leave cocoa vulnerable to further profit-taking volatility. However, the trade fears a shrinking Ivory Coast crop due to typical seasonal hot, dry and windy conditions. While the trade expects this season’s West African cocoa production will improve from last season’s abysmal results, there is increasing concern that the region’s mid-crop cocoa output will fall short of early expectations. West African is currently in the middle of their “dry” season that lasts until mid-March. Updated weather forecasts call for dry and warm conditions across West African growing areas that will be intensified by Harmattan winds, thereby maintaining stress on cocoa tress and pods. Not surprisingly recent trade forecasts are elevating the threat of a 4^th straight global supply and demand deficit, especially if Ivory Coast and Ghana arrivals slow in January as is usual. Furthermore, there are reports that some users/hedgers were forced out of long hedges by the 24% second half of December violent washout in prices which could mean some hedgers remain short/bought and might have to chase the market higher.

SUGAR

While March sugar rebounded from a 3 1/2-month low to finish Tuesday with a moderate gain, that action followed a rough month and quarter for the market. Front-month sugar futures finished 2024 with a loss of 6% but had a 9-month price gain of 10% at the end of September. Nonetheless, sugar prices enter the new year 5 ½ cents below the 2024 high. While the net spec and fund long in sugar came down consistently in the second half of 2024, the most recent net long of 55,018 compares to the largest net spec and fund short of 2024 at 31,100 contracts suggesting there is plenty of short selling speculative fuel available. Updated forecasts have mostly dry weather for Brazil’s Center-South cane-growing areas through late next week, but decent rainfall over the past few months have raised expectations for their 2025/26 cane crop. With above-average Indian monsoon rainfall this year, the outlook for the current 2024/25 Indian cane crop has improved and could encourage India’s government to allow for 2 million tonnes of sugar exports later this year. However, with Indian sugar production recently reported to have dipped by 15.6% (11.3 million tons last year to 9.54 million tons as of December 31st) the good crop argument is dented thereby increasing the potential to respect consolidation low support at 19.00. On the other hand, Thailand’s current cane crop looks to have significant improvement from last season and that should keep overall bullish sentiment in check.

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