AFKI Commodities Report: Arabica Rallies On Renewed Brazilian Crop Worries

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Written by Lynda Davies

Among soft commodities, arabica coffee is retracing towards earlier two-and-a-half year highs on renewed Brazilian crop worries. Platinum and palladium markets are tightening although this is yet to show through in price gains. Crude oil futures found support from renewed tensions in eastern Ukraine although the prospect of Libyan exports rebounding limited Brent’s gains.

Among soft commodities, arabica coffee futures made their biggest rally in six weeks early this week as the market once again focused on the size of this season’s Brazilian crop. The extent of the crop losses as a result of extreme dry weather in January and February in the country’s key southern growing regions is still uncertain. The arrival of rain brought some relief in the past three weeks but many believe it came too late.

Estimates of Brazil’s 2014/15 coffee production range from as low as 40.1 million 60-kg bags up to 56.6 million bags. But the full impact of the drought-damage on output will not be known until the harvest is completed in September. The prospect of a lower crop from Brazil, the world’s top coffee producer and exporter, has been compounded by smaller harvests in Central America, analysts say.

Arabica coffee for May delivery on ICE Futures U.S. in New York climbed to 202.80 cents a pound on Apr. 4, the highest for the most-active contract since Mar. 14, before settling at 196.5 cents a pound. By midweek, arabica finished at 199.05 cents.  Arabica futures reached a two-year high of 208.90 cents a pound on Mar. 11 but dipped to a five-week low of 166.0 a pound on Mar. 24.

Robusta coffee futures in London rose on arabica’s coattails as well on low stocks of robusta beans in Liffe-certified warehouses. July robusta on NYSE Liffe hit a three-week high of $2,180 a tonne on Apr. 8 before settling at $2,166 a tonne.

It was a mixed week for cocoa, however.  Futures in both London and New York initially rose on expectations that upcoming cocoa grind data would show a continued strengthening of demand for the key chocolate-making ingredient. May cocoa futures on ICE Futures U.S. rose above $3,000 a tonne on Apr. 9 to settle at $3,017 a tonne, a three-week high and just $10 off the two-and-a-half year peak of $3,027 reached on Mar. 11.

July cocoa on NYSE Liffe finished at £1,881 a tonne at midweek, only £7 below the two-and-a-half year high touched by the Liffe second-position contract, also on Mar. 11

However, the Brussels-based European Cocoa Association (ECA) on Apr. 10 reported that European cocoa grindings for the first quarter ended Mar. 31, were up just 0.4 percent year-on-year at 340,735 tonnes, a much smaller increase than the three percent rise at least the market had been expecting.

The market is now looking to North American first quarter grindings data, which  are due to be released by the National Confectioners Association in Washington, DC on April 17, for further demand direction.  The Cocoa Association of Asia has yet to indicate when it will publish its quarterly data.

Cotton recovers some last week’s losses

Cotton futures this week initially recovered some of last week’s losses which followed a higher-than-expected U.S. plantings’ forecast by the U.S. Department of Agriculture (USDA).   The most-active May cotton contract on ICE Futures U.S. slipped to settle at 90.98 cents a pound on Apr. 3. But expectations that the USDA would reveal that it had cut its forecast of U.S. ending stocks for the fiber  for 2013/14 (Aug. 1-Jul. 31) pushed ICE May cotton to 92.30 a pound during trade on Apr. 9 prior to the release of the agricultural department’s report.

The USDA did cut its forecast of U.S. ending stocks, projecting  a 2013/14 year-end stock level of 2.5 million 480-pound bales due to lower output. If the forecast proves accurate, this would mark the country’s smallest ending stock level since 1990/91.

Bizarrely, ICE cotton futures fell following the USDA report, with the May contract settling at a two-week low of 90.44 cents a pound. The fall was blamed mainly on profit-taking, according to traders.

Sugar futures were largely trading flat this week. May raw sugar on ICE Futures U.S. settled at 17.06 cents a pound on Apr. 9, only 0.3 cents above its close a week earlier. Refined, or white, sugar futures on NYSE Liffe finished at $454.75 a tonne at midweek, up only a $1 on the prior week.

Platinum, Palladium prices fall

Meanwhile, platinum prices by midweek finished more than $12 lower than where they had closed last week while palladium prices also fell. The price lethargy is despite the ongoing strike at platinum mines in South Africa which is now entering its eleventh week with no sign of any immediate resolution.

The industrial dispute is costing the three affected producers – Anglo American Platinum, Impala Platinum and Lonmin – around 9,900 ounces of platinum and some 5,000 ounces of palladium daily in lost production since the walkout began.

South Africa accounted for some 72 percent of global platinum mining production or 4.12 million tonnes and 37 percent of palladium mining output (2.35 million tonnes) in 2013, according to data from London-based Johnson Matthey. The muted price reaction to date to the strike is in part because producers built up stockpiles ahead of the stoppage while end-users also stocked up.

Palladium markets are being dominated more by concerns about how Russia might react if the U.S. and European Union were to impose further sanctions on the country, and in late March prices climbed to their highest since August 2011 on fears of how Russia might retaliate to Western sanctions.

At the same time, demand for both metals is strong, being driven by the automotive industry which uses the metals in the manufacture of catalytic converters.