We examine performance of the major soft commodities during the fourth quarter of 2012.
Despite a year of more quantitative easing, soft commodity markets slump amid newfound surpluses.
Coffee prices as measured by the ICE futures contract (KC) finished the fourth quarter at $1.438 a pound, down 38 cents, or 21 percent, on the quarter (down 78 cents or 35 percent for all of 2012). The market has been in an almost continuous slide since May 2011, when prices peaked at just over $3.00 a pound.
Lack of demand from manufacturers for Central American washed arabica coffees, the type deliverable against the ICE Futures contract, resulted in weakening cash market premiums and an increase in certified stocks. Manufacturers reformulated blends back in 2011, when ICE prices were soaring above $3.00 a pound in favor of other coffees from Brazil and South East Asia, notably Vietnam. These coffees trade at discounts of 10 to 40 percent below ICE Futures prices even at today's lower levels.
The harvests in Central America are now in full swing and producer selling is traditionally heaviest January through March. Market participants are expecting the new crop pressure to continue to weigh on prices over the next several months. Fund managers dramatically increased their short positions ahead of the harvest during the fourth quarter and are profitably net short 22,000 lots from 6,000 lots three months ago.
After posting a gain of 9 percent in the third quarter, ICE Futures cocoa prices gave it all back during the fourth quarter to settle at $2236 a ton, a decline of $228 or 10 percent (up $208, or 10 percent during 2012).
Ghana, one of the world's largest cocoa producers, triggered the slide in prices beginning in November, aggressively marketing new crop cocoa into a market with weak demand as manufacturers appeared to be already well covered. Additionally, concerns persist about long-term demand prospects for cocoa, especially from Europe, the largest consuming region.
In late November, the International Cocoa Organization also revised its final estimates for the 2011/2012 (Oct-Sept) crop by raising world production estimates and lowering grindings (which roughly approximates consumption). The result was a swing from a small supply deficit of 19,000 tons to a surplus of 90,000 tons. Year-over-year, the ICCO also estimates the key stocks/grinding ratio to have increased from 45.2 to 47.5 percent, reflecting more supply and weaker demand. West African crops, which account for 70 percent of the world's cocoa, appear to be adequate and weather conditions have been generally favorable.
Money managers are painfully net long 39,000 lots, actually increasing their contrarian long positions in a declining market from 31,000 lots at the end of the third quarter.