Soft Commodity Q3 Report: Cocoa Surges 18%, Cotton & Sugar Edge Up, Coffee Searching For Bottom

October 02, 2013

Cocoa, cotton and sugar see weather problems boost prices. Coffee declines on lack of demand..



Coffee 3Q2013

Coffee prices continued to decline in the third quarter, settling just 20 points off the contract low. Prices as measured by the ICE futures contract (KC) finished the third quarter at $1.13 a pound, down 9.65 cents, or 8 percent, and down 42.75 cents, or 27 percent, YTD. The market has been in a long-term downtrend and marked a 4 ½ year low on Sept. 30.

With the harvest in Brazil—the world's largest producer—now complete, traders are eyeing the harvests in Mexico, Central America and Colombia, which begin in earnest in November and run through March of next year.

Weather conditions have been generally favorable throughout the region, which accounts for one-fifth of global production. Latin American production is expected to be off by 1.6 million bags versus a year ago, as a result of coffee rust, a fungus that attacks the leaves of the trees.

ICE futures prices tend to reflect the supply and demand for Mexican, Central American and Colombian coffees, and there is no shortage of nearby supplies. Signifying lack of demand, the total ICE certified stock position currently stands at a healthy 2.8 million bags compared with 2.1 million bags a year ago, and 1.4 million bags two years ago.

Money managers have maintained their profitable net short positions and are currently net short 23,800 lots compared with net short 27,500 lots three months earlier.


Cocoa 3Q2013

Cocoa prices as measured by the ICE Futures contract (CC) rose sharply during the third quarter by $467 a ton to settle at $2640 a ton, up 18 percent over the past three months and up $367 a ton, or 15 percent YTD.

After having staged two failed rallies during the second quarter, the cocoa market finally broke out of its sideways trading range in early August, moving up to a new contract high of $2,657 a ton by mid September.

The sharp rise in prices was not warranted if one looks exclusively at the latest estimate by the International Cocoa Organization. In August, it revised its production estimate of this year’s crop year-ending Sept. 30 upward by 10,000 tons, and raised estimated grindings by 11,000 tons. The result was a statistically unimportant change in the ending stocks to a grinding ratio from 44.5 to 44.6 percent.

Instead, traders have turned their attention to next year's crop prospects. Fueling the market has been reports of drier-than-usual weather in West Africa, which accounts for 70 percent of the world’s production. Adding fuel to the fire for the bulls were reports of strong demand from both North America and Europe.

The rally also caught chocolate manufactures by surprise. They had reduced their forward buying to the lowest level in three years. And yet, like all weather-affected markets, future prices will be dictated by the whims of the weather, and nimble traders know the weather can change quickly.

Money managers got this one right from the start of the move, and have since piled on, increasing their net long position from 42,800 lots three months ago to currently 63,700 lots.


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