Agri-view :: Arabica coffee market update:: Macquarie Research,

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Agri-view
Arabica coffee market update
Feature article
 We review the fundamentals of the arabica market which are seeing NY
prices trying to retest the highs seen in May. The market in the current
2010/11 season is one of the tightest it has been historically, and will remain
so until we get to the next Brazilian harvest due mid-2012. Strong roaster
demand and tight stocks should prevent cash prices collapsing until Q2 2012,
even if NY futures (influenced by macro headwinds) weaken before then.
Latest market update
 Sugar: As Brazil’s suffering cane crop continues to be downgraded, a number
of trade houses have been put out their forecast surplus for 2011/12. Despite
losses in Brazil, production growth elsewhere will see global supply easily
exceed demand - by between 5mt and 9mt – representing the first significant
surplus in 3 years. However, as mentioned before, much of this will become
available towards the end of the year, and physical tightness will continue to
support prices in the very short term. The full influx of exports from ex-Brazil
will be felt into Q1, putting pressure on prices, as Thailand, Guatemala and
India embark on their export programmes. Russia’s import demand will be
virtually nil next season due to fantastic beet yields, leading to a more than
doubling of its sugar crop to 5.5mt. Offsetting this, however, is China, where
import needs will rise to 2.75mt in 2011/12 due to rising consumption. Over
3m ha of China’s main sugarcane area in the southwest is suffering from
drought conditions, and production could well be capped at 11mt.
 Cotton: NY futures shot through the 110c/lb mark last week, as the market
assesses the impact of hurricane Irene and Storm Lee on the already terrible
US crop conditions. Most mills are reporting weak yarn orders. The USDA
failed to reduce the US cotton crop estimates in yesterday’s WASDE as
higher acreage offset lowered yields. Good monsoon rains and record planted
area are expected to result in a record 2011/12 Indian cotton harvest of 27.3m
bales, which should encourage a less regulated export policy during 2011/12.
A 25% year-on-year increase is also expected in China, where cotton
production has been revised up to 34.3m bales. Last week the government
started its purchasing programme, aimed at stockpiling cotton for state
reserves to help aid prices and protect farmers' interests as the domestic
harvest approaches. Zhengzou cotton futures have fallen 40% since
February's record high. The weaker economic outlook concerns us with
potentially negative impact on global cotton demand, and we remain neutral.
 Cocoa: Prices are trading weaker at $2,900/t, weighed down by origin selling
from Ghana, and large stocks. Cocoa arrivals in Ivory Coast ports reached
1.41mt by 4 Sep since the start of the season in October – up a staggering
22% year-on-year. In line with consensus, the ICCO raised their forecast
surplus for 2010/11 to 325,000t – confirming that excellent weather helped
West Africa to reap above trend yields in spite of earlier conflicts in Ivory
Coast. There are concerns over the upcoming main crop, following insufficient
rainfall in August and risk of disease spread. But this season’s excess
production needs to be worked off before getting too bullish on next season’s
expected smaller crop – particularly given the weaker economic climate.