Macquarie Research, Agri-view --Bullish outlook for US cotton offset by bearish global markets

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Agri-view
Bullish outlook for US cotton offset by
bearish global markets
Feature article
 Poor crop progress reports for the developing US cotton crop will likely offset
last week’s bearish USDA acreage report. In our view, low yields and high
abandonment rates will nullify the higher than expected planted acres
suggested by the USDA. But this does not necessarily make for a bull market,
given positive supply prospects elsewhere in the world. A rebound in world
(ex-US) production, coupled with weakened milling demand for cotton sends
bearish short-term signals – although given low stocks, cotton prices will likely
find strong support at 100-110c/lb.
Latest market update
 We had expected sugar prices to come off after the expiry of the July sugar
contract, but Oct futures have rallied further ahead to target 30c/lb on the
back of Brazilian port congestion and expectations that Unica will revise down
its estimates for the CS Brazilian cane crop from 568mt to 520-540mt. They
have already suggested that CS Brazilian sugar production will be at least 1mt
lower than last season. While the 3-month outlook remains in our view
bearish, due to the looming surplus expected to emanate from the developing
northern hemisphere new crops, it appears that in the short-term traders
continue to factor in supply-side risks associated with Brazil’s poor agricultural
cane yields and port delays. The number of vessels waiting to load sugar in
Brazil has risen to 86, up from 64 a fortnight ago. In India, the monsoon
precipitation has so far come in lower than expected in the western states,
causing some concern for plantings. The market awaits India’s OGL exports
to provide short-term supply relief in light of Brazil’s imminent problems.
 The NY arabica coffee market rallied this week to above 265c/lb due to news
of frost in some Brazilian coffee growing regions. There is little evidence of
crop damage though, and prices will continue to be influenced by macro
moves and pressure from the ongoing harvest. Brazilian producers continue
to show strong discipline in selling, as reflected by still firm BMF futures. The
robusta market remains supported by a lack of available supplies in Asia, with
Vietnam’s 2011/12 harvest at least 4 months away. The tightness is being
played out through rising differentials, as London futures continue to face
price resistance on account of large stocks held in Europe.
 The cocoa market put in a strong performance this week on the back of chartbased
technical moves and short covering to shoot past $3,200/t.
Fundamentals, however, continue to look weak, short term. Ghana’s cocoa
purchases are up over 50% season-to-date, at 960mt, and new crop hedge
pressure is already being seen. Around half of Ivory Coast’s stocks (built up
during Q1 during the embargo) have been shipped; but the remainder, coupled
with the supplies from the ongoing mid-crop harvest, is likely to weigh on prices
over the next few weeks. This supply will need to be worked off, before the
tighter balance currently projected for 2011/12 can translate into higher price.
Otherwise, a larger than expected carry-over stock risks dampening prices into
next season too, regardless of lower forecasted global production.