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Caught in a Downward Spiral

September 2015

The global risk aversion combined with surplus stock and subdued demand are dragging agri commodity prices down. What’s next? By Dharmesh Bhatia, Manager – Commodities Market, Emirates NBD Securities

With the assumption of 2% to 16% reduction in production in five major cotton producing countries including India, the International Cotton Advisory Committee (ICAC) has reduced its estimates for global cotton production by 9% to be at 23.8 million ton in 2015-16. However, the global end stock is likely to decrease with the assumption of 2% increase in demand as compared to production in the last five years. As per rough estimates, in spite of cotton stock to be less by 1 million ton during 2015-16, the year-end stock would be at 21 million ton. Rising costs of production and a decreased subsidy in China are likely to lead to a 16% drop in production to 5.4 million tons.

World consumption is projected to rise by 2% to 24.9 million tons in 2015-16. China’s consumption is forecast to remain stable at around 7.7 million tons. However, in India, the real situation is different. According to the latest report of the Cotton Association of India, the opening stock of the new cotton season starting from October 1, would increase by 25% from the 5.89 million bales of the current year and reach at the peak of 7.39 million bales. Further, given the estimates of 40 million bales cotton crop production for 2015-16 season, the situation of surplus stock would worsen further.

China is seeking to reduce its own record stockpiles, accumulated through a government program to support farmers. According to the website of the China National Cotton Information Centre, import during the first half decreased by 33% to be at 933853 ton. Besides, out of the cotton offered for auction merely 8.65% could be sold.

Decline in Palm Oil Price

Global palm oil market demand was 74.01 million tons in 2014 and is expected to reach 128.20 million tons by 2022. However, at present all the indicators of crude palm oil indicate that prices would go down. The undertone of the market is weak. The edible oil markets also indicates bearish trend as well as exports figures too.

One Malaysia shipper stated that it would be difficult to stop prices from further if demand isn’t increased in the consumer countries like India, China and Africa. He added that prospects are bright for bumper soybean and corn crops in the US and Latin American countries, so the price of soybean would crash further from the current $9.5 and thus soya oil’s competition against palm oil would become more acute. Besides, the super cycle of palm oil production would start between August-November and exactly at that time the availability of soya oil and other oils would increase which would put prices under more pressure.

Soybean Futures Heading South

Private exporters reported that Chinese buyers canceled a deal to buy 200,000 tons of US soybeans for delivery during the 2014/15 crop year, the U.S. Agriculture Department recently said. There were rumors in the market about this deal since last several days. Under the immediate impact of this report, soybean benchmark September futures on the Chicago Board of Trade (CBOT) declined by 11.28 cents after increasing for straight three days and quoted at $9.51 per bushel (27.218 kilo). The weather also played its role to put prices under pressure. Soybean also compelled soy cake and soy oil to decline.

The weather also pressured soybeans though the weather so far is non-threatening. Crop prospects are brightened for new crop as the seasonal temperature and rains were conducive in the US mid-west, considered as soybean bowl. Traders are awaiting the August crop report of the USDA, which would reveal the actual sowing of soybean.

In India, due to encouraging rain the sowing of soybean till July 23 this year has been increased from 7.7 million hectares of the corresponding period of the last year and reached at 10.48 million hectares. The Solvent Extractors Association says that the sowing of oilseed is likely to be increased considerably as farmers have received higher prices for oilseeds in the current year as well as the progress of monsoon has been very encouraging.

Sugar Suffers Sharp Selloff

Raw sugar futures hovered recently above a 6-1/2-year low, pressured by a weak Brazilian currency and hefty stocks in Asia, while Arabica coffee futures firmed and cocoa held steady in light volumes. “The influence of the real (Brazilian currency) and the very strong dollar has ultimately been the driver of the weakness in sugar prices for some time now,” said Tracey Allen, commodities economist with Rabobank. September Arabica futures were up 0.7 cents at $1.2465/lb. “Because there isn’t a fundamental story for the market to hold on to, it’s following the commodities complex and the fundamentals of the dollar,” said Ricardo Santos, coffee trader with Equatorial Traders. He was referring to a softer dollar against a basket of currencies, underpinning dollar-based Arabica and Robusta coffee futures. September Robusta futures were up $8 at $1,633 tons, after touching a two-month low of $1,621 recently.

There is ample supply of raw sugar in the global market. Thus, market is struggling to come out from the bottom of six and half years. After knowing that speculators have increased their short position to a new peak of two and half years, bulls abandoned their efforts to stretch prices. Indian players stated that we are still in short position mood and at present no fundamental event is visible to change our strategy. Speculators who have adopted short position are right at present.

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