Cocoa better bet than coffee, sugar, says Commerzbank

24 Mar 2017

Cocoa is the best bet among soft commodities, Commerzbank said, forecasting price rises – in contrast to somewhat bearish expectations for coffee and, especially, sugar futures.

The bank termed "exaggerated… the slump" in New York cocoa futures which took them to $1,881 a tonne last month - a nine-year low on a spot contract basis, and down 45% from a high set in late 2015.

While acknowledging the "huge rise" in world cocoa output in 2016-17 - backed by estimates of a record crop in top producer Cote d'Ivoire - the bank viewed as overplayed ideas voiced by the International Cocoa Organization last week of global production surpluses for years ahead.

"We are sceptical at the moment that ICCO concerns about a period of structural surpluses on the cocoa market are justified."

'Fraught financial situation'

Commerzbank cautioned that the Cote d'Ivoire cocoa sector is in fact "plagued at present by problems that could dampen the longer-term outlook for production".

Farmers are facing a "fraught financial situation", in the face of contract cancellations prompted the weak prices, with tight purse strings likely to prompt cutbacks in use of measures to boost yields and tackle plantation disease.

The bank forecast the recovery in in cocoa futures, which for May delivery stood at $2,164 a tonne on Friday to "continue for a while".

Futures were seen averaging $2,300 a tonne in the October-to-December period, above the $2,183 a tonne at which the December contract was trading at on Friday.

'Prospect of another deficit'

However, on coffee the bank - while raising its forecast for the price of London-traded robusta beans over the October-to-December period by $100 a tonne to $2,100 a tonne – left it below the futures curve.

November futures are trading at $2,199 a tonne.

Commerzbank flagged higher expectations for robusta output in Brazil as well as Vietnam, the top grower of the bean, with growing conditions seen as improved from the weather-affected levels of last year.

Still, seeing New York-traded arabica futures trading ending the year at 145 cents a pound, close to the current market level, the bank cautioned investors against being too pessimistic on coffee prices, given that 2017 will be an "off" year in Brazil's cycle of alternative higher and lower arabica producing years.

"The prospect of another deficit on the coffee market is likely to lend further support to prices."

Sugar price forecasts slashed

In sugar too, the bank flagged the potential for being unduly bearish on prices – even as it slashed its forecasts for New York prices by up to 3.0 cents a pound, seeing futures average 17.0 cents a pound in the October-to-December quarter.

That is below the 17.86 cents a pound October futures were priced at on Friday.

While many commentators believe world output will exceed consumption in 2017-18, after two years of deficit, "only when a significant surplus can actually be foreseen for the coming season should prices fall on a lasting basis".

The bank cited growing doubts over India resorting to sugar buy-ins, saying it is "still unclear whether India will have any imports at all", as key to the 10% tumble in sugar futures over the past month.

After dryness hurt India's 2016-17 cane crop, constraining sugar output to an estimated 20m tonnes, "a strong recovery in production is expected in 2017-18, with most estimates being at least 25m tonnes".

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