AFKI Commodities Report: Cocoa Prices Rally Over West Africa Production Concerns

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Written by Lynda Davies

Crude oil prices continue to tumble while their plunge has refuelled gold’s safe-haven investment appeal. Among soft commodities, arabica coffee futures remain volatile amid Brazilian weather worries and sugar spikes up from a three-month low.

Cocoa Under Pressure

Concerns that the Harmattan wind blowing across Cộte d’Ivoire and Ghana as well as Nigeria could reduce the size of this season’s cocoa crops in those countries continue to underpin the market.

An intensification of the seasonal wind that brings dry, dusty air from the Sahara typically from December to March across parts of West Africa has raised concern that it is damaging cocoa trees. Cộte d’Ivoire, Ghana and Nigeria, together with Cameroon, typically account for around 70 percent of world cocoa production.

Cocoa futures on New York’s ICE came under pressure this week amid a firmer dollar against a basket of currencies. A stronger dollar makes dollar-based cocoa more expensive in other currencies. However, London cocoa, which trades in sterling, benefited from a weaker UK pound against the dollar.

New York March cocoa touched a low of $2,888 a tonne on Jan. 6, before trimming losses to finish at $2,902 a tonne, down $42 on the day. London cocoa for May delivery dipped to £1,991 a tonne before settling at £2,000 a tonne, a £12 loss on the day, but a £13 gain on the week so far. New York March cocoa had finished last week at $2,944 a tonne.

Oil Slide Continues

The first days of 2015 have seen further falls in oil prices and as yet no sign of where the price drop will stop. Prices, which already saw a near 50 percent decline since June by the close of 2014, have shed a further 9-10 percent in value since the new year began as ample global supplies continue to weigh on the market.

The international benchmark North Sea Brent crude for February fell below $50 a barrel on Jan. 7 –  the first time since 2009 –  to touch a more than 5⅟2-year low of $49.66 before trimming losses to settle at $51.15. The U.S. benchmark West Texas Intermediate (WTI) for February dropped to just $46.85 a barrel on the New York Mercantile Exchange (Nymex) before clawing back to close at $48.65, 72 cents up on the day.

The slight rebound in the U.S. oil price at midweek was largely thanks to an unexpected decline in U.S. crude inventories. According to the U.S government’s. Energy Information Administration’s (EIA) latest weekly oil market report on Jan. 7, the country’s commercial oil stocks fell  by 3.1 million barrels during the week ended Jan. 2.

Analysts had expected an increase of 0.9 million barrels. On Jan. 6, a report by the American Petroleum Institute had shown a U.S. crude stock fall of 4 million barrels for the same week.

However, at the same time, the EIA reported an 8.1-million barrels’ build in U.S. gasoline stocks and a 11.2 million barrels’ increase in the country’s distillate fuel stocks during the week ended Jan. 2. This reflected weak demand for both products and was further confirmation of an oversupplied market. Crude stocks at the key Cushing, Oklahoma, storage hub were also up by 1.3 million barrels last week.

U.S. crude production is running at its highest in three decades, having surged from around 5 million barrels a day six years ago on amid the country’s shale oil drilling boom. According to the EIA, U.S. crude output reached 9.132 million barrels a day last week, up from 8.145 million barrels a day in the same week a year ago and just over 7 million barrels a day at the start of 2013.

Gulf oil producer members of the Organization of the Petroleum Exporting Countries (OPEC), meanwhile,  seem to be showing no signs of wanting to cut their output. OPEC opted to leave the group’s production target unchanged at 30 million barrels per day at its last official meeting on Nov. 27, despite calls from some of the smaller OPEC members for a reduction.

Commerzbank in a daily commodities note this week highlighted estimates by the major energy agencies, that will put the oversupply on the global oil market in the first half of this year at a total of approximately 1.5 million barrels per day unless production is cut. Yet there are no signs of this happening at present, the bank said.

Gold At Three-Week High

Gold prices rose to their highest level in three weeks on Jan. 6, as plunging oil prices triggered worries about the state of the global economy, refuelling the precious metal’s safe-haven investment appeal.

Gold for February delivery on the Comex division of Nymex ended $15.4 a troy ounce up at $1,219.40, the highest level for the most actively traded contract since Dec. 12. This marked a $33.4 gain on last week’s close at $1,186.2 a troy ounce. February gold eased back a tad at midweek, settling $8.7 down on the day at $1,210.7 a troy ounce.

Arabica Remains Volatile

Among soft commodities, Brazilian weather concerns continue to drive arabica coffee futures as analysts and other market watchers this week took stock of reports that precipitation levels in the country’s key growing region of Minas Gerais are forecast to be roughly only around their half normal levels since November.

The arrival of rains had gone some way to assuage worries about the extent of damage inflicted on the country’s coffee bean trees following severe drought conditions early last year and the potential impact on 2015’s production.

The front-month March arabica contract on New York’s ICE Futures U.S. exchange surged as high as $1.8285 a pound on Jan. 7 on the latest precipitation reports from Brazil, before setting at $1.7505 a pound.

This was 14 cents up on Jan. 2’s finish at $1.6105 a pound. At the start of this week, March arabica had dropped to a fresh 5⅟2-month low of $1.6010.

Robusta coffee on the London-based ICE Futures Europe exchange rebounded from the sharp sell-off at the end of last week which led to a steep fall in futures prices.

Robusta for March delivery settled at $1,980 a tonne at midweek, $28 up on the day, and a $116 gain on Jan. 2’s close at $1,864 a tonne. On Jan. 2, March robusta had settled $52 down on the day, underlining just how volatile coffee futures remain.

The market this week largely ignored a forecast by the Vietnam Cocoa and Coffee Association (Vicofa) that the country’s coffee exports are expected to decline 12 percent this year to 1.4 million tonnes.

Vicofa estimated coffee exports in 2014 had reached 1.6 million tonnes. The association’s 2015 export expectation is based on a forecast of a 20-25 percent drop in the country’s coffee output this year, due to weather problems, especially due to El Niño, and slow re-planting of coffee trees by farmers in parts of the Central Highlands.

However, many analysts and trade forecasts currently expect only a small dip in the country’s coffee production. Vietnam produces mainly robusta coffee, and is the world’s largest producer and exporter of this variety of coffee beans.

Africa’s top coffee exporter, Uganda, saw its exports fall 16.6 percent year-on-year in November, as an outbreak of beetle pest impacts production.

The Uganda Coffee Development Authority reported the country exported 219,948 60-kg bags of coffee in November, although it expected export shipments to have increased in December to 240,000 bags.

If realised, this would still result in 6.6 percent  year-on-year decline in the country’s coffee exports in 2014. Uganda’s coffee production typically comprises around 80 percent robusta and 20 percent arabica beans.

Sugar Spikes From Three-Month Low

Raw sugar, meanwhile, spiked sharply higher after hitting a fresh three-month low at the start of the week. The front month March raw futures contract on New York’s ICE surged to 15.06 cents a pound on Jan. 6, having slipped to 14.07 cents the previous day, its weakest in three months.

Reuters, quoting traders, said the spike was largely the result of buy-stop orders at around the 14.50 cents a pound level. March raw sugar subsequently finished at 14.78 cents on Jan. 7, up 0.61 cents on last week’s close at 14.17 cents a pound

March white, or refined, sugar on London’s ICE Futures Europe also finished higher by midweek, settling at $389.90 a tonne, marking a $10.8 gain on Jan. 2’s close at $379.10 a tonne.

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author can accept no responsibility for any errors or any consequence arising from the information provided.