AFKI Commodities Report: Mixed Outlook For Agri-Commodities

Written by Lynda Davies

Uncertainties over Brazil’s arabica coffee production is expected to keep prices firm next year. But after a stellar performance for much of 2014, cocoa futures prices are retreating as the market is seen by some analysts and market watchers to be shifting into surplus. It was another week of decline on oil markets, with Brent and WTI now trading at their weakest in more than five years

Arabica futures dipped to their lowest level since September this week as rains in top producing country Brazil were seen as positive for the development of the 2015-2016 (Oct. 1-Sept. 30) crop.  Severe drought conditions early this calendar year damaged coffee trees in the main growing regions in the centre and south of the country and  impacted this season’s output.

There are worries that the development of the next crop will also be affected and any rains are seen easing the pressure on the coffee trees.  Many believe, however,  the drought already has inflicted irreversible damage on 2015-2016 crop.

Arabica coffee for March delivery on New York’s ICE Futures U.S. exchange dropped to its lowest level since September on Dec. 4, touching a low of $1.810 a pound, before settling at $1.824, down 1.20 cents on the day.  ICE March arabica had finished last week at $1.874 a pound.

The worries about Brazilian arabica coffee output drove ICE coffee futures to 26-month highs of $2.157 a pound in April, a level that was approached once again in September. Furthermore, the tighter supply situation and declining stocks are expected to keep prices elevated throughout  2015.

Brazilian production will remain the key price driver through 2015, and many uncertainties remain regarding the potential for the next crop, Rabobank said in its recently published ‘Outlook 2015: Rebalancing after finding the lows’ report.

“In our view, there is little room for the 2015 crop to surprise to the upside. Coffee prices are expected to remain elevated and volatile through 2015, supported by a tighter year-over-year arabica supply situation and a decline in stocks,” the bank said.

Based on the midpoint of a possible Brazilian crop range in 2015 at 45 million 60-kg bags and consequently  a combined deficit of 5.1 million bags of coffee (both arabica and robusta), the  bank sees average ICE arabica futures prices averaging 195 cents a pound in the first quarter of 2015, up from 190 cents in the fourth quarter of this year, and moving up to average 200 cents a pound in the second quarter of next year.

However, the bank warned that if adverse weather were to persist or intensify in Brazil, the supply situation could become “truly critical”, driving prices high enough to curb demand.

Unlike the arabica market, the robusta coffee market is in balance and, according to Rabobank, is expected to see a modest 2.6 percent growth in 2014-2015. Brazilian robusta-growing areas were hardly affected by the drought and top producer, Vietnam, is heading for another bumper crop this season.

January robusta coffee on the London-based ICE Futures Europe exchange settled $3 down at $2,048 a tonne on Dec. 4 and $26 below last week’s close at $2,074.

Cocoa set to remain under pressure

The prospects of good output in the main harvests in the coming weeks amid favourable weather in top cocoa producing countries, Côte d’Ivoire and Ghana, continues to weigh on cocoa prices. ICE March  cocoa on Dec. 4 settled at $2,865 a tonne while  cocoa for delivery in the same month on  London’s ICE Futures Europe finished at £1,905 a tonne.  Prices  have climbed sharply this year, underpinned by industry buying and  expectations of another year of global deficit. In September, worries that the Ebola epidemic would spread to Côte d’Ivoire and Ghana and disrupt cocoa supplies from those countries pushed cocoa to a 3⅟2-year high with the second-position contract on ICE hitting $3,399 a tonne. In London, the most-active contract touched £2,140 a tonne.

But cocoa prices have been retreating in recent weeks as the market is seen by some analysts and market watchers to be shifting into surplus, and consequently they expect prices to remain under pressure in 2015. However, as reported here last week, some market watchers are forecasting a global supply/demand deficit in the 2014-2015 (Oct. 1-Sept. 30) cocoa season, citing smaller-than-last season main crops in the two West African countries.

Rabobank analysts are among those expecting cocoa prices to remain under pressure as the world cocoa supply/demand balance shifts into a surplus – of some 110,000 tonnes during 2014-2015 (Oct. 1-Sept. 30), according to the bank’s projections, from “a neutral balance” of 11,000 tonnes in 2013-2014.

“The demand outlook is relatively weak, with grindings expected to increase by a mere 1 percent to 4.3 million tonnes, up from 4.26 million tonnes in 2013-2014,” the bank  said in its  ‘Outlook 2015: Rebalancing after finding the lows’ report, citing declining European grinding as the main factor.

Barring the Ebola epidemic interrupting production and trade flows of West African cocoa beans and products, the bank sees ICE cocoa futures easing from an average of $2,800 a tonne in the first quarter of 2015 to $2,700 a tonne in the fourth quarter.

The International Cocoa Organization (ICCO) is forecasting a global cocoa supply surplus for the 2013-2014 season (Oct. 1-Sept. 30) of 53,000 tonnes, a recent upward revision  from its previous surplus estimate of 40,000 tonnes. A larger-than-previously expected mid crop in top grower Côte d’Ivoire and a temporão crop (forecrop) in Brazil contributed to the upward revision, according to ICCO’s Quarterly Bulletin of Statistics published on Nov. 28.

Côte d’Ivoire’s 2013-2014 production was raised 11,000 tonnes to 1.741 million tonnes, reflecting a 20 percent increase on the prior season. Second biggest producer Ghana is expected to see a 7.4 percent rise in output to 896,917 tonnes for 2013-2014, although the output figure reflects a downward revision on ICCOs’ previous estimate.

The global supply deficit in 2013-2014 compares with a supply shortfall of 222,000 tonnes in the previous cocoa year, according to the intergovernmental organisation’s data.

ICCO revised slightly upwards its estimate of global cocoa grindings, taken as an indication of cocoa demand,  for 2013-2014. It now sees world grindings increase 3.4 percent year-on-year to 4.268 million tonnes up from the previous estimate of 4.262 million tonnes.

According to ICCO’s report, Côte d’Ivoire is set to become the world’s largest cocoa grinder following the start-up  in the second quarter of 2014 of the Olam cocoa processing plant in San Pedro, a key cocoa-shipping port in the country. The country’s cocoa grinding increased 10 percent in the 2013-2014 cocoa year to 520,000 tonnes, second in volume only to The Netherlands which processed 530,000 tonnes, ICCO said.

The volume of cocoa processed in Africa rose 8 percent to 860,000 tonnes in 2013-2014, reflecting an increasing trend for more beans to be processed in the countries where they are grown. According to the ICCO report, total ‘origin’ grindings increased  almost 6 percent in 2013-2014 and now account for 45 percent of global cocoa processing.

ICCO in a separate statement has responded to numerous media reports  identifying potential deficits in the supply of cocoa in years to come, possibly reaching 1 million tonnes in 2020.  The intergovernmental organisation said its projections “in no way bear out this fear, which it finds to be overstated in the extreme”.