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Easter eggs likely to get expensive as cocoa trades at a 46-yearCocoa was the best performing commodity in 2023, recording a price increase of 64%1. Cocoa prices have continued to rally in 2024 crossing the threshold of US$5000 Metric Ton (MT) on 2 February 2024. The last time cocoa prices rose to this magnitude was in 1977 when it reached US$5379MT. A similar situation prevailed back then, adverse weather conditions led to production scarcities in major cocoa production countries including Ghana and Ivory Coast. Current crop conditions remain unfavourable in key cocoa growing regions Weather conditions in Africa have been unfavourable particularly in the Ivory coast and Ghana. This matters as the cocoa producing belt of West Africa is responsible for generating over 80% of the total global output. Ghana is the second biggest producer in the world. Moisture levels have been below average, and more trees have been affected by the Swollen Shoot Virus (CSSV). Main crop cocoa arrivals at ports in top grower Ivory Coast had reached 951,710 tonnes by 21 January since the start of the season on 1 October, down 33% from the same period last season. The cocoa harvest is already falling well behind the prior year’s level. Added to that, the key West African Cocoa growing region is facing dry Harmattan winds which could destroy the cocoa pods growing for the Ivory Coast’s mid-crop in April. Ivory Coast halts forward sales of cocoa Ivory coast has suspended forward sales of cocoa beans for the 2024/25 season amid uncertainty about the production volumes. The country has seen its cocoa production falling this year due to adverse weather and diseases damaging the crop. Owing to which the country doesn’t want to oversell the 2024/25 crop until the production estimates are available. Buyers typically utilise forward sales to secure longer-term supplies. As Ivory Coast suspends forward sales, the absence of forward buying is likely to spur spot purchases in the near term. Cocoa prices in January itself have risen 13%2, on strong buying activity in the physical market. The front end of cocoa futures curve remains in backwardation, yielding a positive implied roll yield of 3.2% indicating near term tightness in supply. Bearish grinding data fails to arrest cocoa’s price rally Concerns started to surface that demand growth for cocoa will be impacted by higher cocoa prices. This was confirmed by the Q4 2023 data on cocoa processing which showed the grind number for North America was down 3% yoy to 103,971MT, Europe declined 2.5% yoy to 350,739MT while Asia saw the biggest decline at 8.55% to 211,202MT.3 The lower grind data is likely to have reduced the deficit on the global cocoa market from 350,000MT to 300,000MT for the 2023/24 crop year. However, expectations of lower grinding data was being anticipated by the market owing to higher cocoa prices. Amidst the current backdrop, the cocoa market is likely to face a supply deficit in the current crop year for the third successive year. The extension of the current price rally remains dependent on development of the mid-crop in Ivory Coast and Ghana and the likely impact of the CSSV. Net speculative positioning in cocoa futures is more than 1-standard deviation (stdv) above the five-year average underscoring bullish sentiment towards cocoa. Sources 1 Source: Bloomberg Cocoa Futures price performance from 31 December 2022 to 29 December 2023 2 Source: Bloomberg Cocoa Futures price performance from 3 January 2024 to 31 January 2024 3 Bloomberg as of 31 January 2024 This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
NYMEX:CJ1!
by aneekaguptaWTE
Grains outlook hangs in the balance of the Black Sea Grain deal The failed rebellion by the Wagner group over the June 24th weekend brought to light not only the ineptitude of the Russian top military command but also the carefully crafted image of President Putin as the guarantor of stability. Putin’s assertion that the quick end of the 24-hour revolt had shown the unity of Russians behind him was contradicted by footage of adoring crowds cheering Prigozhin and his fighters as they came out of a southern city they had occupied. It is possible that Putin could step up the escalation between Russia and Ukraine to re-establish his position which currently appears weakened. The recent political turmoil in Russia lowers the probability of the Black Sea Grain deal being extended beyond mid-July (current deal expires on July 18th). No respite in Russia’s sabre-rattling Even prior to the failed coup in Russia, pessimism had been expressed by both the Russian and Ukrainian sides. One senior Ukrainian diplomat has even spoken of a 99% probability of Russia withdrawing from the agreement. Russia has repeatedly threatened to quit the deal, complaining that obstacles remain to its own exports of food and fertilizer. It has also demanded the re-opening of the ammonia pipeline as a condition for renewing the grain corridor deal through the Black Sea. However, the ammonia pipeline was damaged a day before the Kakhovka dam was destroyed on June 6. This increases the risk that Russia could after all follow through on its threat and revoke the grain deal as early as July. Grains outlook clouded by Black Sea Grain deal The original agreement brokered on 22 July 2022, by the United Nations and Turkey to open a safe maritime humanitarian corridor in the Black Sea helped to address the global food security crisis and lower grains prices. Participants on the agricultural markets remain anxious on the extension of the current deal and it could lend additional tailwinds to grains prices. According to data from the Commodity Futures Trading Commission, wheat, corn and soybeans saw a 21%, 43% and 35% decline in short positioning underscoring a shift in sentiment towards weather uncertainty and geopolitical risk premiums. Top wheat producers forecast weak supply outlook owing to adverse weather conditions The prospects for the wheat crop in key producer countries has disappointed of late owing to adverse weather conditions. Dry conditions and low soil moisture in the west and east coasts of Australia imply that much of the 2023-24 crop has been sown dry and will require adequate and timely rain to allow the plants to germinate. Wheat is a major winter crop in Australia with planting from April and the harvest starting in November. The expected onset of the El Niño conditions from July will likely see winter crop output fall significantly according to Australian Bureau of Agricultural and Resource Economics and Science (ABARES). Across the globe, wild weather is affecting crops elsewhere, including Americas and North Africa. Europe is also being impacted by high temperatures and scant rainfall, increasing the risk of damage to the continent’s wheat crops. On the flip side, Canada and Ukrainian wheat supply forecasts are positive. According to Statistics Canada, 26.9 million acres have been planted with wheat – not only is this the highest figure in 22 years, it is also 0.4 million acres more than the analysts surveyed by Bloomberg had expected . The Ukrainian Grain Association (UGA) predicts significantly higher yields this year, meaning that the crop – contrary to what has been expected so far – could actually turn out to be higher than last season. However Ukrainian farmers are likely to struggle to export their grain owing to the uncertainty surrounding the Black Sea grains corridor. Corn market remains bullish Dry weather in the US and Europe has seen the condition of the corn and soybean crop deteriorate resulting in a price positive environment for corn and soybean. The United States Department of Agriculture’s (USDA) in its latest crop progress report continues to highlight concerns for the US corn and soybean crop, given the current dry weather conditions. The USDA rates 50% of the corn crop in good-to-excellent condition compared to 67% seen at the same stage last year. Moreover, the rating of the corn crop is the lowest seen for this time of year since 1988. This implies that the USDA’s optimistic forecast of 15.3bn bushels for the us corn crop in 2023/24 will hardly prove reasonable any longer. The National Centres for Environmental Prediction said it expects many parts of the Corn Belt that have been turning dry over the past month will get more rain than usual for this time of year over the next two weeks marking a change from earlier indications that El Niño would limit rainfall for thirsty crops. Soybean is also facing a similar story with 51% of the soybean crop rated good-to-excellent condition compared to 65% at the same time last year . Growing pessimism over the extension of the Black Sea Grains deal beyond mid-July is also likely to lend an additional tailwind for corn and soybean. Weak Chinese imports through most of the 2022/23 season surged in May to over 14.8mmt of corn, wheat, and soybeans, which was the highest monthly total since June 2021 . However we would caution that a fairly muted crop-based biofuel quotas from the US Environmental Protection Agency could offset some of the strength in Chinese demand. The front end of the soybean futures curve has extended its backwardation, now providing investors a 6.4% roll yield compared to 0% last month . This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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by aneekaguptaWTE
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On a sugar high, owing to weak supplySugar prices have soared this year, up +21.6%1 owing to concerns about tight global supplies. Lower Indian supply coupled with weaker than expected output from Thailand, (at the second and third largest sugar exporters respectively) continue to provide a tailwind for sugar prices. While Brazil’s harvest in the coming months is expected to be strong, logistical hurdles owing to higher exports of soybean and corn could restrict supplies over the coming months thereby supporting sugar prices higher. Net speculative positioning on sugar is 139% above the 5-year average2. Over the past month, short positioning has declined 16% highlighting the improvement of sentiment on the sugar market. Weaker sugar supply from India India is one of the largest exporters of white sugar, but shipments are controlled by quotas. The Indian Sugar Mills Association (ISMA) latest report indicate that Indian sugar production fell marginally to 28.2mt so far this season through 15 March3. ISMA cut its sugar production estimate for 2022/23 crop year to 33.5mn tons from 34.5mn tons on account of lower output and more use of sugarcane for biofuel. Sugarcane processing in Maharashtra, the most important growing state, could end 45-60 days earlier than last year because heavy rainfall has reduced the availability of sugarcane. Sugar production in Maharashtra is likely to total a mere 12.8mn tons according to the chief of State’s sugar commission, nearly 1mn tons less than previously anticipated. Lower sugar output is raising concerns that the India government could restrict additional exports. More use of sugar diverted to India’s Biofuel program At the same time, Indian Prime Minister Narendra Modi is pursuing an aggressive biofuel program that will see more sugar cane diverted to make ethanol to help curb air pollution and reduce oil import bill. The biofuel program also lies in the interest of farmers by making use of excess local production and boosting their incomes. This season, the government plans to divert 5mn tons of sugar to make ethanol, up from 3.6mn tons a year earlier4. The eventual goal is to divert 6mn tons annually toward fuel production by 2025. Lower sugar production in Thailand remains price supportive for sugar Thailand’s Office of the Cane and Sugar board confirmed that Thailand crushed 93.88mt of sugarcane in 2022/23, lower than the initial estimates for more than 100mt of cane5. As a result, the bumper crop expected in Thailand is also falling short, resulting in 2022/23 total sugar output in Thailand will be at around 11mn tons (versus the 12mn tons expected earlier in the season)5. Lower than expected output from Thailand combined with less supply from India remains price supportive for sugar. The front end of the sugar futures curve remains in backwardation yielding a positive roll yield of 2.9% reflecting tightness in the market for short term balances. Logistical bottlenecks could restrict supply from Brazil Looking ahead, progress of the sugar crop in the Centre- South region of Brazil remains a key headwind for sugar prices. Brazil sugar production is expected to be over 36.5mn tons in 2023/24, only slightly less than the all-time high of 38.4mn tons seen in the 2020/21 marketing year6. However, shipping Brazilian sugar could face delays in the Port of Santos as it competes with exports of other Brazilian grains such as corn and soybean. Road freight is also likely to face significant price increases. Santos terminals receive sugar and grains by trains and trucks. However, competition from transporting soybeans has been taking space away from sugar in train cars. Higher freight prices impact the margins of the mills. Likelihood of El Niño, if realised, remains price supportive for sugar With La Niña over, there is now a chance the Pacific Ocean surface could warm later this year and spark what is called El Niño. The US Climate Prediction Centre has raised the likelihood of an El Niño emerging between August and October to 74% from 61% a month ago. One common knock-on effect is higher precipitation volumes which would be positive for sugar prices over the medium term with fewer milling days and sugar production. El Niño could bring relief to drought parched areas of Argentina and southern US, but it could also lead to hotter and drier conditions in parts of Asia and Australia. Conclusion Restricted supply from India alongside lower supply from Thailand have helped sugar along its upward journey so far. Looking ahead, with the Argentinian soybean crop forecasts struggling in the face of the ongoing drought, we expect Brazil to do a lot of the heavy lifting by offsetting the shortfall in supply of both soybean and corn. This is why, logistical hurdles are likely to impede the supply of Brazilian sugar thereby supporting sugar prices higher over the medium term.
ICEUS:SB1!
by aneekaguptaWTE
OPEC’s supply cuts pre-empt economic weaknessThe Organisation of Petroleum Exporting Countries and its partners (OPEC+) producers surprised the market with a decision on Sunday 2 April 2023 to lower production limits by more than 1mn barrels per day (bpd) from May through the end of 2023. This decision was announced ahead of the OPEC+ Joint Ministerial Monitoring Committee (JMMC) meeting scheduled on 3 April and was contrary to market expectations that the committee would keep policy unchanged. Over the prior week, OPEC+ ministers were giving public assurances that they would stick to their production targets for the entire year. This cut tells us that OPEC+ is pre-empting weaker demand into the year and was looking to shore up the market. OPEC+ announcement may have caught speculators by surprise It is evident Sunday’s decision caught the market by surprise evident from the commitment of trader’s report which showed net speculative positioning in Brent crude oil futures at -44k contracts were 146% below the 5-year average. Sentiment on the crude oil market had been weak prior to the decision. Demand outlook remains soft amidst weaker economic backdrop OPEC has been markedly dovish on oil demand for some time relative to other forecasters such as the Energy Information Administration (EIA). This cut helps solve the disparity that existed between OPEC and the EIA. OPEC expects oil demand to grow by around 2mn bpd in 2023. A significant portion of this growth (nearly 710,000bpd) is reliant on Chinese oil demand . Given that such a large amount of demand hinges on a single economy poses a risk to the demand outlook as the pace of China’s recovery post re-opening has not been as robust as previously anticipated. At the same time, tightening credit conditions owing to the recent banking crisis is also likely to weigh on growth forecasts in the rest of the developed world. Global Purchasing Managers Indices (PMI) indicators suggest manufacturing activity has contracted since September 2022. Supply outlook will be driven by new OPEC+ cuts Since Russia has been producing less than its notional limit, the reduction on actual production will be less than 1mn bpd. But with Saudi Arabia committing to voluntary reduction of 500,000bpd we would expect the overall decline in OPEC supply to be around 900,000bpd by the beginning of May 2023. Assuming OPEC production holding at the recent 28.9mn bpd for April, our balances would point to an equilibrium in Q2 and a return to a deficit in Q3 and Q4. This deficit is largely a function of OPEC+ cuts as opposed to stronger demand globally. The front end of the Brent crude oil futures curve remains in backwardation with a roll yield of +0.4% OPEC+ producers can also cut without the fear that they will lose significant market share to non-OPEC members. Previously, OPEC+ would be reluctant to let prices rise too high, as it would incentivise a supply response from US producers. However, US producers today appear more focussed on capital discipline and maximizing shareholder returns. The US also has limited capacity to plug the shortfall created by OPEC+ cuts owing to last year’s unprecedented release from strategic US oil reserves (now at a 40-year low). Conclusion In the short term, OPEC production cuts are almost always supportive evident from the recent price reaction Brent crude oil prices have risen (+6.54% ). However, over the medium term, the price response to cuts have been more mixed as they do tend to signal underlying weakness in the supply/demand balance. Either OPEC countries are expecting demand to be significantly weaker or doubt oil production in Russia will decline as sharply as forecasted. So, with speculative positioning at currently low levels alongside further inventory draws expected later in the year, the risks are titled towards the upside for crude oil prices. However, given the uncertainty in the macro environment, we expect the upside in prices to be capped at about US$90 per barrel.
NYMEX:BB1!
by aneekaguptaWTE