Cocoa best bet among softs - coffee, cotton, sugar prices 'not cheap'

12 Jan 2017

Cocoa looks the best bet among soft commodities for price rises, veteran analyst Judith Ganes Chase said, warning of "somewhat bearish" dynamics in coffee, and cotton prices that are already "too attractive" for growers.

Ms Ganes Chase named cocoa futures - which touched $2,121 a tonne in New York in late December, the lowest for a spot contract since March 2013 - as her "favoured pick" among soft commodities "as a market that has room to climb".

"The cocoa market remains at low levels relative to the rest of the softs complex and would seem to have fundamentals that are not quite as bearish as market action suggested," she said.

While acknowledging firm expectations for cocoa output in Ivory Coast, the top producer, saying that "there is no anecdotal evidence to believe the crop will miss production targets", Ms Ganes Chase flagged potential support to prices from demand.

"I still believe that cocoa grind will improve and absorb the big supplies due to favourable processing margins this season compared to recent years."

On Wednesday, AC Nielsen research revealed a late-2016 improvement in US chocolate demand, with market sales up 2% in December, compared with an average growth rate in the July-to-December half of 0.2%.

'Not as optimistic'

By contrast, Ms Ganes Chase, president at J Ganes Consulting, said she was "not as optimistic about consumption picking up steam" in coffee, cotton, orange juice and sugar markets, which are "certainly not cheap to stimulate strong uptake.

"I believe the days of demand-driven markets are gone for the foreseeable future. Prices are not cheap enough, for starters."

In sugar, while noting that world output will fall behind demand for a second consecutive season in 2016-17, she said that the "stock reduction is nowhere near as troublesome as many perceived earlier in 2016.

"My concern is focused on the consumption side with no strong players needing sugar and that could limit price advances," while alternative sweeteners are finding increasing acceptance.

'Too much supply'

The rally in cotton futures, meanwhile, which last week touched a four-month high of 75.37 cents a pound in New York, seemed to be sowing the seeds of its own destruction, in encouraging farmers to plant the crop.

"Higher prices were needed to assure that planting decisions include cotton over other crops, but now prices may be too attractive and lead to too much supply in 2017-18 if the weather is favourable for plantings and harvesting," Ms Ganes Chase said.

"Already preliminary figures are pointing to an acreage jump of around 8-10% in the US alone."

And this when "advancing prices are sure to push buyers back to the sidelines and could force demand more towards man-made fibres over cotton.

"Current prices are already too high and will have a negative impact on demand."

'Isn't reason for bullishness'

As for coffee, noting export statistics, she said that "I still don't see" the evidence of tight supplies that caused New York-traded arabica futures to touch 176.00 cents a pound in November, the highest since January 2015.

"Export data from the International Coffee Oorganization points to large shipments and likely destocking by producers to take advantage of the better prices.

"It also points to increased availability from medium-size producers that are helping to counter the worries over limited Robusta availability from top suppliers, Vietnam and Brazil."

Until overall export volumes "truly taper off, there isn't reason for bullishness absent any developing weather issues".

'Needs close monitoring'

She added: "Fundamentals still lean somewhat bearish due to ongoing large exports, sufficient stocks in consumer hands and bright prospects for 2017-18 production recovery."

One potential threat to that outlook is dry weather in parts of Brazil, which could stunt the growth of branches which will carry the 2018 crop, besides undermining development prospects for beans to be harvested this year.

"I think it is far too soon to sound alarm bells for the developing crop but certainly the situation needs close monitoring."

Coffee exporter Terra Forte on Tuesday - in its first forecasts for Brazilian coffee output in 2017-18, an "off" year in the country's cycle of alternate higher and lower harvest years - saw arabica production dropping 13% to 38.18m 60-kg bags.


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