Sugar Futures Hit Resistance

SUGAR

Back in early September, sharp declines in March sugar attracted buyers on the approach of 16 cents. However, buyers clearly stepped back as prices recovered with open interest, plummeting from 961,453 contracts on September 8^th to only 834,338 contracts yesterday. Therefore, we expect buying to continue to evaporate and this week’s high of 16.69 is likely to become a consolidation high resistance area. Combining with the negative technical set up is fresh bearish supply news from Brazil which saw its primary center South region produce 15.7% more sugar in the first half of September compared to year ago levels. Fortunately for the bull camp the proportion of sugarcane used to produce sugar fell by nearly 1%. In other words, sugarcane production in Brazil shifted slightly toward ethanol which is a very minimal support for sugar futures. However, the Brazil production increase was as expected thereby reducing its bearish impact on prices. While long-term in its impact, reports earlier this week that India might begin to use corn to produce ethanol in the country, that would certainly reduce Indian sugar demand needs/imports during weak monsoon seasons.

COCOA

With a big range down extension throwing December cocoa back to the lowest level since last November we suspect Commodity Index Trader longs are rushing to the exits. Clearly, the trade is embracing a major double negative fundamental condition with supply expected to ramp up at the same time it feels like structural demand destruction is finally manifesting after two years of prices running 2 to 5 times the long-term level of prices seen in the previous 18 years. Expectations for the new incoming West African crop are ramping up with sharply higher farmgate prices expected to pull in cocoa faster than normal. In fact, after the Ivory Coast raised its farmgate price by 55% yesterday, Ghana overnight raised their farmgate price by another 12% after raising the new crop year price earlier this year. Farmgate prices are usually set once per year but the massive explosion in prices prompted an additional adjustment. So far, the 11 month range in cocoa is $6200 per ton and it is possible that prices could plummet below farmgate pricing which in of itself could foster issues for producing countries. This year’s farmgate price in Ghana is roughly $4,640 per metric ton with the farmgate price in the Ivory Coast set yesterday at a record $4,260 per metric ton.

COTTON

The question for cotton is “where will the market find a fresh bullish fundamental catalyst”? However, there does appear to be some long accumulation taking place after prices fell below 67.00 with open interest in the last three months rising from 202,049 contracts to 278,283 contracts (in a dead market). On the other hand, bearish fundamentals still dominate with cotton supply widely seen at a very burdensome surplus, at the same time low prices have stirred only limited buying. In fact, there does not appear to be any notable threat against supply which is spread out around the globe. In fact, cotton analysts see higher upcoming production from the US, China, and Brazil with US harvest also coming in faster than the previous year. While global stocks to use figures have declined from above 90% in 2014 to the latest USDA projection of 61.5%, global stocks to use looks to have generally settled into a range of stocks to use between 60% and 70%. Therefore, with cotton prices reaching a long-term consolidation support level (on the monthly charts) prices have returned to levels seen in 2011 when stocks to use first exploded significantly above long-term average levels.

COFFEE

While the soft commodity markets aren’t tightly correlated from a fundamental perspective, they can trade in sync in certain environments. We suspect sector fund reallocations can result in major capital adjustments as most markets are impacted by global demand forces and at present negative physical commodity demand expectations dominate. However, Arabica coffee held in ICE warehouses fell again yesterday by 16,315 bags providing the market with support from the supply side of the equation. On the other hand, coffee prices have reached significantly elevated levels with the high last month, approaching three times the level of prices two years ago. While it is possible that coffee prices are being supported by reports that Brazilian exports this year will only reach 40/41 million bags compared to last year’s export record of 50.5 million bags that is mostly the direct result of US tariffs which reduced Brazilian supply flow to North America. In August, Brazil exported 3.1 million bags of coffee of which 2.9 million was delivered to Cecafe. While not a direct near-term negative to prices, a report overnight indicates Brazil will likely overtake Vietnam as the world’s largest robusta producer as Brazil production is more productive/efficient than Vietnamese output.

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