Taking A Look At Soft Commodities
I expect soft commodity markets to continue trading in a volatile fashion over the coming weeks driven chiefly by their own specific supply and demand dynamics, rather than wider macro-developments. My key thoughts are as follows:
- The cocoa market will likely to remain volatile and I do not rule out continued gains in the coming weeks towards GBP3,000/tonne. However, I expect prices to be lower in 2011 and as a result, see potential for a cyclical peak in prices in H210.
- Sugar presents impressive potential for a short-term rally, although I expect prices to grind lower over the medium term.
- While potentially overdone on a short-term basis, the medium-term outlook for coffee prices has firmed markedly.
I continue to anticipate a moderation in cocoa prices as we move into 2011. However, given the volatile nature of cocoa prices, the timing of such a pullback is difficult to predict. I expect that the pickup in grindings that traditionally occurs in Q3 and Q4 will keep pressure on global stocks. Therefore, it is unlikely that market tightness will be noticeably relieved until Q410/Q111, when cocoa arrivals at ports in Côte d’Ivoire begin to flood in. I expect the global supply outlook to improve gradually from this point. Indeed, my colleagues at BMI forecast global cocoa production to outstrip consumption in the 2010/11 season for the first time since 2005/06. In my view, this should encourage a moderation in global cocoa prices and as a result, I see potential for a peak in cocoa prices in H210.
Meanwhile, front-month (July) sugar could bounce strongly in the short term. The contract has continued to edge higher in recent trading and has broken above key resistance in the USc16.00/lb area. A weekly close above USc16.00/lb would further improve the technical picture and open the door for a more pronounced bounce towards the USc18.00/lb area. The global sugar market remains tight on a historical basis and therefore, a tentative uptick in global imports has the potential to catalyse a bounce in prices. However, despite potential for a short-term rally, I expect a steady improvement in global supply of sugar to encourage a gradual drift down towards multi-year support which currently comes in around the USc12.00/lb area.
Front-month (July) Arabica coffee has exploded higher in recent trading and the medium-term outlook is increasing bullish. Calling short-term moves in this sort of market is somewhat of a lottery. Nonetheless, the recent break higher has markedly firmed the medium-term outlook for coffee prices. In particular, it has bolstered my view that market tightness will underpin coffee prices in the coming months. This is despite the scheduled surge in supply of beans from Brazil that should accompany the 2010/11 ‘up’ year in the country’s biennial coffee cycle as it progresses.