Agri-view: Most softs still bullish despite less speculative froth:: Macquarie

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Macquarie Agri-view
Most softs still bullish despite less speculative froth

Feature article
 Soft commodity prices had reached new multi-year highs earlier this month,
following the US Federal Reserve’s second bout of quantitative easing. Funds
poured money into commodities amidst expectations of a weaker US dollar.
But last week’s fears over the Eurozone's sovereign debt crisis and China’s
monetary tightening reversed this trend, with many funds switching out of
commodities amidst renewed risk aversion and back to the safe haven dollar.
The subsequent sharp drop in prices over the past ten days has shaken off
some of the speculative froth that had been built into the price uptrend. It is of
interest, however, to see that many softs are back up again. Depending on
the commodity, this suggests that underlying fundamentals in certain markets
remain constructive. We look to see which market will recover from the sell-off


Latest market update
 Amidst a commodity-wide sell off following renewed risk aversion, sugar
prices are showing some resilience. The market is entering its tightest period
in the year, with the Brazilian cane harvest tailing off, and weather related
delays to the crush season in India and Thailand. Concerns that total sugar
recovery levels will fall in India’s cane are leading to fears that the country
may not have the necessary surplus required to lift exports to a world that is
crying out for more sugar.

 Coffee, which also suffered from the sell-off, is also finding support. A
disciplined lack of origin sales, coupled with the re-entry of some hedge funds
looking to buy on dips has seen the decline capped. The outlook for coffee
remains bullish, with differentials still holding up well. Colombian coffee
output, already hit by adverse weather and diseases, is now impacted by
blocked roads and landslides from torrential rains. About one-third of
Colombian coffee land has also been hit by an outbreak of roya fungus, while
official forecasts point to higher than normal rains last until March-May 2011.

 NY cotton futures bounced to a firmer finish on Wednesday to $1.17/lb, as
technically oversold conditions and prospects of greater Asian demand growth
helped prices snap a two-week losing streak that shaved more than 26% from
the market. Availability of cotton remains tight in the physical markets, and no
where more so than in China, despite all its attempts to control agflation and
limit speculation on its futures exchanges. China is allocating trains to ensure
adequate distribution of cotton from the main cotton producing regions to
elsewhere in the country.

 Cocoa futures continue to trundle along at a sluggish pace, amid expectations
of a market surplus and hedging pressure. Although cocoa arrivals in the Ivory
Coast are down 20% year-on-year, cocoa purchases in Ghana are up by
39%, owing to a large crop, reduced smuggling and attractive fixed prices.
Brazil's main crop which began in Oct is also off to a strong start, with arrivals
earlier this month at their highest since the mid 1990s. This Sunday sees the
second round of the Ivorian elections. The market needs to brace itself in
case of political unrest and any associated disruption in cocoa supplies.