Speculators too long sugar, too short coffee, but fine in corn:: Macquarie Research,

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Speculators too long sugar, too short
coffee, but fine in corn
Feature article
 The macro-economic client has been challenging at best in recent weeks, and
it should come as little surprise that funds are taking risk off the table by
shunning risky asset classes such as commodities. But within the Ag
commodity space, we are seeing divergences amongst the futures markets as
speculators pick and choose which commodities to remain exposed to given
the differing fundamental outlooks. Non-commercial traders have reduced
exposure to commodities such as coffee and cocoa, but are still very net long
sugar and grains. While we agree with the net length in grains, we think that
sugar is vulnerable to a sell-off as fundamentals are weakening. We also think
that coffee could be primed for a temporary rebound into year-end as physical
arabica supplies fall short of demand, and speculators may want to re-enter
the market from the current net short position.
Latest market update
 Sugar prices fell this week to 27.9c/lb on negative macro-economic news
over the deteriorating European debt crisis as well as weaker physical
demand. Premiums for Thai J-spec raw sugar have plunged to 80 points
above NY, from as high as 500 points in early July on competition from
Philippine supplies, and weaker refinery demand from Japan. In CS Brazil, the
consensus for the cane crop is edging below 520mt, although this is rapidly
getting “priced in”. The Brazilian port vessel line has fallen to 54 from 86 ships
a month ago. Prospects for northern hemisphere sugar crops continue to
improve. Russia’s Sugar Producers' Union expects a record 4.2m t of white
sugar from domestic beets this year due to increased sown area, while India’s
key Maharashtra state is on track to reap a record 9.3mt sugar crop in 11/12.
 Coffee prices are still finding support at 240c/lb, despite the large net short
spec position, as producers continue to hold back on sales. Brazil’s conilon
(robusta) harvest finished this week, while roughly 70% of the arabica
harvesting has been already done. Supplies could thin out into Q4, when
roaster demand peaks. Certified European robusta stocks are showing signs
of falling after reaching record highs in July, as roasters, unable to source
coffee (or priced out) from Asian origins any more, are forced to turn to LIFFE.
 Cocoa futures weakened on continued evidence that this season’s surplus
will reach 400mt, following above normal production in West Africa, with
prices falling through the $2,905/t support. Open interest has reached a 3½
year high according to ICE due to increased spread trading and narrowing
arbitrage with LIFFE, which has helped lift certified US stocks to a 1-yr high.
 Cotton saw additional net length being added to the NY futures this week, as
some funds deem the 50% plunge in prices since March to last week’s low of
93c/lb, overdone. However, mixed factors are tugging cotton prices in both
directions, with India having lifted the cap on restricted cotton exports from
now through to September. The ICAC this week forecast that global cotton
supply would rise 8%, while demand would rise only 2%, allowing for an
improved stock/use ratio of 43% (against the current 37%)