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19.01.2018

Commodity market overview: January 2018

Coffee

Having spent the majority of 2017 in a downtrend that followed the 2016 peak in non-commercial futures positioning, coffee prices continued to fluctuate near the past year’s lows when the USDA coffee report was released on December 15, 2017. Its key highlights were centered on a decline in Brazil’s arabica production due to an off-year of the biennial production cycle.

Despite the slight improvement in the supply balance outlook, Arabica coffee futures are being traded at relatively low levels and might present an opportunity, which is only reinforced by the fact that non-commercial short positions have only recently edged away from all-time high levels.

There are two main reasons behind an expected year-on-year decline in Brazil’s Arabica production this season year: smaller coffee beans in areas of Minas Gerais and Sao Paulo, and the previously-mentioned arrival of an off-year of the biennial production cycle. As a result, country’s Arabica production is currently forecast to slide to 38.8 million bags, down 14.9 percent from the multi-year record of 45.6 million in the 2016/17 season year. The general trend has already been incorporated into the earlier forecasts dated June 2017, although the agency had to revise its forecasts lower from a previously-anticipated decline of 11.2 percent. While not the world’s largest Robusta producer, Brazil is forecast to demonstrate a year-on-year production increase of 18.1 percent, bringing its total Robusta supply to approximately 12.4 million bags.

Adjusting for the pickup in Robusta production, Brazil’s total coffee output is thus currently forecast to decline by 4.9 million bags – an 8.7 percent year-on-year decrease. As a leading global producer, Brazil continues to have a major impact on the global production data. Except for a notable increase in Vietnam’s Robusta production – currently forecast to rise by 11.7 percent to 28.6 million bags – production of both coffee types is not expected to demonstrate any major changes this season year.

Assessing the supply tightness conditions in the coffee market, one may find it immensely useful to track the relationship between ending stocks and total consumption, together with an Arabica-to-Robusta production ratio. Although no general rule of thumb exists, historical dynamics indicate that coffee market tightness usually occurs when ending stocks are approaching (or falling below) the 20 percent level. For as long as there are limits to the bitter-tasting Robusta’s ability to substitute the commonly preferred Arabica, decreases in the Arabica-to-Robusta ratio – together with low ending stocks – may be viewed as a rather bullish development for Arabica futures prices.

Since 2009, 2 out of 3 major coffee bull markets were to a larger degree influenced by declines in the stocks/consumption ratio. During the price run-ups between December 2008 and May 2011 and the one from November 2015 through October 2016, the ratio was fluctuating between 20.9 and 22.4 percent. According to the December USDA update, its 2017/18 value is currently estimated at 18.5 percent – a 3rd consecutive annual decline around the 20 percent level.

Volatile production outlook has been oftentimes resulting in crowded positioning on both long and short sides of the coffee futures market. 2 out of 3 major bull runs in coffee since 2009 have been to a larger degree driven by reversals from excessive net short positioning levels. Although not a clear contrarian indicator, elevated short positioning clearly increases the chances of a price run-up once the weather ¬and crop data begin to change. Latest COT positioning data continues to demonstrate bearish sentiment. Despite edging notably higher from mid-December levels, non-commercial net short positioning remains at near-record levels.

Despite the fact that the risk/reward of the long coffee trade has been undoubtedly improving lately, it would be too early to write off the downside risk. Although the Brazilian real has mostly been trading sideways throughout last year, its depreciation – for political or macroeconomic reasons – might put additional pressure on the already compressed coffee price. In the meantime, key producing countries’ weather news will remain crucial for the short-term price volatility.

Wheat

Following an upward revision in December, USDA corn production forecast for the 2017/18 season year was once again raised in January’s WASDE update. Global production is currently seen at 757 million tons – an all-time record. Despite demonstrating continued growth, global consumption is not keeping up with the production data and is currently forecast at 741.7 million tons, up 0.3 percent from the previous season year. As a result, ending stocks are currently expected to demonstrate a 6 percent year-on-year increase to 268 million tons. Despite the notable net-short non-commercial position, wheat futures suffered a sharp decline on the WASDE data and are currently trading near the previous year’s lows.

Corn

USDA corn forecasts saw no material revisions in January. Global production for the 2017/18 season year is currently seen at 1044.6 million tons – slightly below the consumption forecast of 1066.7 million. World ending stocks are thus expected to decline 9.7 percent to 206.6 million tons.

Soybeans

There was only a minor downward revision for the soybean production forecast, which is currently seen at 348.6 million tons for 2017/18. Despite continued consumption growth – estimated at 301.45 million tons – global ending stocks are expected to remain nearly unchanged at 98.6 million tons. Although the soybean futures welcomed the WASDE data with a sharp uptick, large traders maintain a net short exposure to the soft commodity.

Soybean meal

With global soybean meal ending stocks forecast to remain nearly unchanged year-on-year at 12.3 million tons (down 0.8 percent), with production – currently seen at 236.7 million tons – slightly above the consumption estimate of 233.1 million tons. Soybean meal futures continue to more or less track the soybeans dynamics, with the latter staying considerably more volatile on sharp price moves.

Rice

Despite a minor upward revision to 484.7 million tons, 2017/18 rice production forecast remains below the previous year’s value of . With global consumption estimated to remain nearly unchanged year-on-year at 481.8 million tons, ending stocks are projected to rise to 141 million tons. Despite a positive reaction to the WASDE report, non-commercials have been increasing their net short exposure to the rice futures contract since early December.

Cotton

Despite a notable cotton’s year-on-year consumption increase in the 2017/18 season year – currently seen at 5.3 percent – global ending stocks are expected to remain nearly unchanged due to a parallel uptick in production levels. Global consumption is currently projected at 120.83 million bales – just below the production estimate of 121 million. With ending stocks remaining at 87.8 million bales, cotton futures contract remains in an uptrend established in November 2017, with non-commercial net long exposure rising over the corresponding period.

Sugar

The sugar futures contract remains under pressure from rising production levels in the EU and India. Historical demand dynamics are also becoming increasingly affected by a gradual social and political movement against sugar in dairy products, which is in contrast with an overall dairy product consumption growth driven by rising global population. As non-commercial exposure remains neutral amid a relatively weak open interest, the sugar futures contract has mainly been trading sideways since July 2017.

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