Sugar a better bet than coffee or cocoa, says ABN

October 30th, 2014

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Category: Cocoa, Sugar

Sugars-Full(Agrimoney) – ABN Amro flagged upside potential for sugar futures, but was downbeat on price prospects for other soft commodities, foreseeing robusta coffee returning below $2,000 a tonne, and a 10% drop in arabica values.

The bank said that it was “hard to see any upside” for now in sugar prices, unless fears re-emerge for an El Nino weather pattern, which is linked, for example, to dry weather in Australia, India and Thailand, major cane-growing countries.

“Sugar price will remain under pressure as a result of the lingering oversupply,” following four successive seasons of world production surplus.

However, price weakness could prove temporary, ABN AMro said, recommending investors to “buy the sugar dip into 2015”.

‘Future deficit’

Longer-term, the impact of this year’s drought on Brazilian cane, “and decreased husbandry could hurt sugar production even further” in the top producing country.

“For the current crop, the Brazil cane crush is already 8.5% below last year’s record crop.

“More tightening of the global production surplus may result in a future deficit, leading to rising sugar prices,” ABN Amro said, forecasting sugar futures rising to 18.50 cents a pound at the end of April, 2 cents above the level New York’s May 2015 contract is pricing in.

New York sugar prices will average 18.00 cents a pound over 2015 as a whole, a price level investors do not currently see being reached until May 2016.

‘Lower negative impact’

However, for arabica coffee, the bank’s expectations of New York futures averaging 170 cents a pound next year are well below the level close to 200 cents a pound that investors are factoring in.

The bank acknowledged the threat to Brazilian production even in 2015 from this year’s drought, which has disrupted the vegetative growth, and flowering, needed for the cherries harvested next year.

However, rains could yet “stir hopes of a lower negative impact”.

Separately, meteorologists at Somar on Thursday forecast rains of 2-3 inches for Brazil’s coffee belt over the next two weeks.

And given that investors have already built a large net long position in the bean, “anticipating the worst outcome, signs of significant rainfall and/or an improving outlook for the Brazilian crop could result in… the unwinding of these speculative long positions”.

‘Dampening effect’

For robusta coffee too, the bank forecast London-traded futures trading below the levels currently foresee, expecting an average level of $1,900 a tonne next year.

Futures for 2015 were trading on Thursday in a band between $2,037-2,083 a tonne.

“With a bumper Vietnam robusta crop expected, and improved production in Indonesia, the robusta coffee market will be well-supplied,” ABN Amro said.

“This, in turn, will have a dampening effect on upside price prospects.”

‘Facing a downtrend’

On cocoa too, ABN Amro forecast an easing in prices – assuming that Ebola does not spread to Ivory Coast or Ghana – seeing futures average $2,750 a tonne in 2015, below the spread of $2,895-2,908 a tonne being factored in by investors.

“Fundamentally, without the Ebola threat, cocoa prices should be facing a downtrend,” the bank said.

“Healthy supply numbers for 2013-14 and beneficial conditions during this season’s crucial growing phase bode well

“The effects of the record 2013-14 production and healthy forecasts for 2015 will only be seen in the course of 2015 itself.”

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