Soft Commodity Markets Struggle, Erode, Slump and Crash In Second Quarter

July 08, 2013

Strong supplies of coffee, cocoa, cotton and sugar pressure prices, which is hoped to spur demand.


A minor influence in prices has been felt by the strengthening of the U.S. dollar. Most soft commodities are grown in emerging economies and are dollar-denominated. A strengthening U.S. dollar tends to increase exports by creating remunerative returns in local currencies. Managed money has demonstrated time and time again it can ride a trend but can't create and sustain one. The dominant drivers of prices for softs are the individual patterns of supply and demand distinctive to each commodity.


Coffee prices nose-dived during the past three months. Prices as measured by the ICE futures contract (KC) finished the second quarter at $120.40 a pound, down 20 cents, or 15 percent, on the quarter, and down 32 cents, or 21 percent, YTD. Prices had reached a high of $1.51 a pound in early May only to fall to a low of $1.17 just five weeks later. The market has been in a long-term downtrend since May 2011 from a peak of more than $3.00 a pound.

The harvest in Brazil, the world's largest producer, is mostly complete. In its latest report, the USDA estimates Brazil's 2013/2014 crop to be at 53.7 million 60 kilo bags, down 2.4 million bags from the previous year due to a biennial off-year cycle. Total world production is forecast at 146 million bags (down 4.4 million bags), with Vietnam at 24.8 million bags (unchanged), Mexico and Central America at 16.5 million bags (down 1.4 million bags), and Colombia at 9.0 million bags (unchanged). Consumption is expected to rise modestly.

Money managers have maintained their long-held and profitable net short positions and are currently net short 27,500 lots compared with net short 26,000 lots three months earlier.


Coffee 2Q 2013



Cocoa prices are marginally lower. Prices as measured by the ICE Futures contract (CC) declined during the second quarter by $32 a ton to settle at $2,164 a ton, down 1 percent over the past three months and down $100 a ton, or 3 percent YTD. The market staged two failed rallies during the quarter, the first up to $2,443 a ton in early May, and a lower high up to $2,384 in early June.

The latest forecast from the Intentional Cocoa Organization for the 2012/2013 crop year ending Sept. 30 projects total world production to drop year-over-year by 111,000 tons to 3.97 million tons. Total world grindings (which approximate consumption) are forecast to be 3.987 million tons, up 1 percent, based on indications of better grindings and consumption in Europe, which accounts for 40 percent of world cocoa processing.

The result should be a reduction of ending stocks to 1.773 million tons representing a stocks/grinding ratio of a still-very-comfortable 45.5 percent compared with 46.4 per cent a year earlier.

Money managers are betting prices are going higher and have increased their net long position from 13,000 lots three months ago to currently 42,800 lots.

Cocoa_2Q 2013


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