Soft commodities on opposite trajectories as 2017 begins

by Ron Sterk
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Ron Sterk

Soft commodity futures — specifically cocoa beans and sugar — saw dramatic price moves in opposite directions during 2016. Supply factors to a much greater extent than demand will continue to dictate price direction in 2017.

Nearby New York ICE cocoa bean futures ended at a 3½-year low on Dec. 30, 2016, down 33% from the end of 2015 and posting the largest year-over-year drop since 1999. Nearby New York ICE world raw sugar futures (No. 11) hit a 2016 high just below 24c a lb on Oct 5, up 56% from the end of 2015. Prices then fell 18% through Dec. 23, but the nearby contract gained 7% in the last week of December and still posted a gain of 28% for the full year.

Speculative trading, fueled only slightly by the fundamentals of supply and demand, has played a key role in both cocoa and sugar futures. For cocoa the speculative net long position hit a three-year low of 8,532 contracts in the week ended Aug. 2, 2016, but recovered some in subsequent weeks and ended the year at 22,618 contracts, according to Commodity Futures Trading Commission data. In sugar, the speculative long position was a record-high 290,127 contracts in the week ended Oct. 4, 2016, but tumbled 61% to 112,783 contracts by Dec. 27, C.F.T.C. data showed.

Cocoa beans grow primarily in West Africa, Central and South America and Southeast Asia. Production depends largely on weather and may swing significantly from year to year. Cocoa bean products (butter used in chocolate and powder) are consumed mostly in the United States and Europe. Demand depends more on economic conditions and tends to see more gradual changes.

Global cocoa bean supply was in a slight surplus (production exceeded grindings) of 52,000 tonnes in 2014-15, according to the International Cocoa Organization (I.C.C.O.). In 2015-16 the world market initially was forecast to see a 212,000-tonne deficit as production fell from the effects of the El Niño weather pattern (grindings up slightly but bean production down 6%). Nearby cocoa bean futures neared $3,400 a tonne in December 2015, the highest since February 2011. But the I.C.C.O. revised its 2015-16 deficit forecast to 150,000 tonnes in November 2016 (after the marketing year ended Sept. 30), indicating higher production and lower grindings than earlier forecast, though both were below 2014-15 levels. Improved weather has boosted prospects for the current 2016-17 crop in top-producing West Africa and bean deliveries to port cities in the Ivory Coast were running ahead of the year-ago pace in December. Nearby cocoa bean futures, meanwhile, tumbled below $2,200 a tonne in December.

World sugar supplies are in their second year of deficit, largely due to lower cane sugar output from the effects of El Niño in top-producer Brazil and No. 2 producer India. Nearby world sugar futures fell to a multi-year low just above 10c a lb in August 2015 after five years of surplus. As the magnitude of the 2015-16 global deficit became realized and prospects for a second year of deficit took shape, prices more than doubled to a high of just below 24c a lb in early October 2016. Prices pulled back some in December as analysts trimmed 2016-17 deficit forecasts, but resumed their upward trend as December ended.

As an indication of forward pricing, cocoa bean futures are flat to slightly higher through most of 2018 while forward sugar futures are at a fairly sizable discount to the nearby, suggesting little change in the bearish cocoa bean outlook and the possibility of less bullishness in the sugar outlook in 2017.

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