Sugar Slumps on Surplus Fears

SUGAR

A lower low (six-day low) reconfirms the downtrend with global surplus fears accentuated by projections that global sugar production will increase by 8.3 million tons from last year’s output of 189.3 million tons. The fear of a global surplus provides the core of the bear case especially with India planning to expand exports and support domestic farmers with higher farmgate pricing. Indian 25/26 gross sugar production is pegged at 34.3 million tons with sugar production pegged at 30.9 million tons Unfortunately for the bull camp Indian sugar production is expected to increase by 18% and an increase in Indian exports from the 1 million tons allowance to 1.5 million tons will allow for more sugar on the world market than in the previous year. In addition to expanded Indian export quotas, the Indian government has raised the minimum sugar price to farmers which should facilitate production. However, increased sugar crush activity for ethanol in Brazil and India will provide some cushion against next year’s rising tide of supply. A fresh negative for sugar prices is news that Chinese imports of sugar in November were down 18.2% versus last November but year to date Chinese imports remain almost 10% higher year-over-year.

COCOA

The cocoa market is facing countervailing fundamentals with bearish longer-term global surplus estimates recently chopped by 41% and recent West African rains improving production estimates for next year. However, recent increased arrival rates have boosted production estimates and there is talk of harvest delays because of precipitation running above normal and the approach of the high winds/hot temperature season adding to near term supply side concerns. On the other hand, the cocoa market annually frets over the prospect of lower production from insufficient inputs, aging trees, crop diseases and fluctuating weather. Some traders see cocoa smuggling from the Ivory Coast reduced dramatically this year which could provide a lift to production estimates later this year. With open interest dropping into the rally toward $6500 last week, trading volume softening and a general belief that Ivory Coast production is likely to rise, the bear camp should retain control. However, above normal rain could provide a slight and temporary reduction in arrivals which in turn could spark a ripple of production suspicions.

COTTON

Even though cotton reached an oversold technical condition following Friday and Monday selloffs, the markets saw a sharp jump in trading volume during the December 16th washout suggesting interest in selling remains in place. Furthermore, a reduction in speculative shorts provides some minimal technical oversold “balancing” especially with the market seeing an increase in physical trading on the Monday washout which normally indicates a bearish trade posture. Even though March cotton posted an early minimal higher high relative to yesterday, bullish fundamentals remain scarce. In fact, thinning holiday trading conditions ahead could narrow ranges in cotton and leave the bearish bias in place. As in many industrial commodities, the demand outlook for cotton remains bearish especially after the week over week decline in US cotton exports of 39,000 bales.

COFFEE

With a lower low overnight, the lowest price since September 25th and a decline below the 200 day moving average (at 346.59), good Brazilian harvest weather and perhaps most importantly aggressive selling by local traders in Vietnam leaves the path of least resistance pointing down. However, the most recent COT positioning report (December 2nd) showed a reduction in the managed money net long, the noncommercial and nonreportable net long and the CIT net long which could signal a market approaching a short-term modest somewhat liquidated status. A private Brazilian company projected 26/27 arabica coffee production at 49.7 million bags while the latest USDA forecast of the Brazil 25/26 arabica crop was only 38 million bags. In other words, expectations of perfect production weather in Brazil boosts oversupply fears especially given higher supply expectations from favorable Vietnamese production. In the near-term, more Vietnamese beans are flowing to the market and that flow should increase. While the market has priced in a significant reduction in Brazilian coffee exports to the US from US tariffs (down by 54.9% August through November) that situation might be nearly factored into prices. Nonetheless, it should be noted that ICE arabica touched three-month lows early today extending the bearish chart set-up.

Interested in more futures markets?  Explore our Market Dashboards here.