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Realization that India demand will remain slow and that extra sugar from India backing out of import deals (estimated at near 100,000 tonnes so far) has sparked a very bearish tone to the sugar spot market. Traders are fearful that washouts could increase to near 600,000 tonnes quickly if sugar prices don’t bounce as India buyers pay a stiff penalty and back out of deals. An official with the India Mills Association indicated that sugar supplies in India are comfortable and that the country does not require further imports. Spot prices in India have slipped to the lowest level since October. May sugar pushed sharply lower on the session yesterday and moved to the lowest level since early August. A strong US dollar, weakness in the energy complex and a higher production estimate from India are all factors which helped spark another round of long liquidation selling and the move under last week’s lows attracted additional selling pressure. Pakistan announced a tender to buy 200,000 tonnes of white sugar but this failed to provide much support and the speculator long liquidation selling helped drive the market lower. This selling continued in the overnight hours and May sugar is down as much as 358 points off of Monday’s highs and more than 1000 points (10 cents) off of the February 1st reversal top.
The COT reports on the weekend showed that speculators were still in a long liquidation mode and that speculators still held a massive net long position. Non-commercial traders (funds) still held a net long position of 153,218 contracts as of March 2nd. Russia imports in January came in at 82,600 tonnes from 12,700 tonnes last year as the import tariff is down and could slip further in the months just ahead.

TODAY’S GUIDANCE: Buyers could emerge on the break but for now, minor bearish news is snowballing to major long liquidation selling. A 50% retracement of the entire bull market of 2007 to 2010 comes in at 19.38 and this may now act as short-term resistance with 18.43 as next target.

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May cocoa fell to a fresh 6 1/2 month low yesterday. The market closed at the lowest settlement price since August leaving long-term downside price risk in place. With the fundamental outlook turning increasingly bearish, eventually we see May cocoa falling back towards the $2,600 price level. However, based purely on technical signals, May cocoa may be able to stage a bit of a recovery soon given the market’s extreme oversold condition. We don’t expect this to be much more than a dead cat bounce since a bearish long-term chart formation, a rising supply outlook and lack of investor interest will likely combine to keep the market’s downtrend in tact. May cocoa set a double top at the December and January highs and retracement targets of the contract low (November 2008) to high range are at $2,748 and then $2,567. The odds of the market continuing to trend lower seem to have improved yesterday after the ICCO forecasted a bearish shift in the market’s fundamental setup for next season. The ICCO’s executive director is forecasting a global cocoa surplus of as much as 90,000 tonnes for the 2010/11 season compared to an 18,000 tonne cocoa deficit predicted for 2009/10. The ICCO sees global cocoa output rising by 5% next season and at twice the growth rate of global grindings citing the likelihood that high cocoa prices, which hit a 32 year high in the NY market in January, will promote higher production under normal weather conditions. It is interesting to note that the cocoa market’s dip to a new low for the move yesterday apparently didn’t attract any fresh industry buying. Perhaps after the ICCO predicted a much higher forecast for the Ivory Coast mid-crop of between 310,000 and 320,000 tonnes, chocolate manufacturers may decide to stay on the sidelines in anticipation of lower prices into the April harvest which could leave the cocoa market without a strong price floor. ICE cocoa warehouse stocks stand at 4.540 million bags, down 7,499 bags.

TODAY’S GUIDANCE: The cocoa market remains highly influenced by the currency trade and with the Pound under pressure in the early overnight action it leaves May cocoa at risk of retesting yesterday’s low. Currency influences may need to turn more supportive before any significant technical bounce in cocoa is seen.

TODAY’S MARKET IDEAS: While we see the trend continuing down, traders also need to be mindful that cocoa is overdue for a technical bounce and short position holders may want to have trailing profit stops in place.

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Traders have been focused on the potential for a big crop in Brazil which will help ease tightness in the cash market for the past month but the market may have already “priced in” the large Brazil crop and the focus may shift to spot market tightness ahead of the harvest. Cash premiums remain high for many Central America growths led by Colombia but traders see better production from Colombia for the harvest this fall. The head of the International Coffee Organization believes the world coffee production for the 2009/10 season will reach near 126 million bags which is up from a previous estimate of 124 million. Consumption is thought to be near 134 million bags per year. Therefore, a jump of near 8 million bags for the Brazil crop this season would just help the market avoid a production deficit but will not help build stocks. While we could see a slight world production surplus this season, the surplus should be small and there is still the potential for quality issues due to uneven flowering. May coffee surged higher to break-out to the upside of a 10-session trading range yesterday. The rally also penetrated the downtrend channel resistance and this may have added to the technical buying support. A strong US dollar and weakness in other commodity markets kept the market under pressure early but ideas that it will take more time to see less “tightness” in the short-term supply ahead of the Brazil harvest, and that it will take longer for Colombia to see production back to normal, helped support the solid gains. The Coffee growers federation of Colombia believe Colombia production was just 650,000 bags in February as compared with 868,000 bags last year. Traders believe that March production will be higher than February and that April will be higher than March and so on but the recovery in production is coming slower than expected. This was an annual pace of 7.8 million bags and traders see 2010 production near 11-12 million. On top of an improving chart picture, the steady rise in open interest off of an early March low during a period of base-building is seen as a positive development. Daily ICE certified deliverable coffee stocks were down 23,200 bags to 2.729 million with 3,413 bags pending review.

TODAY’S GUIDANCE: The upside break-out is impressive and the May coffee should find close-in buying support near 132.02 with 136.05 and 138.45 as upside targets.

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The market went into a holding pattern overnight ahead of the USDA’s March supply and demand report, after dropping sharply in pre-report action yesterday. Overnight action consisted of a small bounce that flew in the face of a higher dollar. Some traders are looking for another adjustment upward in US cotton exports today with a commensurate drop in ending stocks, but the slowdown in export sales last week may have reduced the likelihood that another significant adjustment will be made on the March report. Open interest continues to climb with the total up over 23,000 contracts in cotton since mid February as of March 9th. Economic news and sentiment remains on the positive side with China’s announcement that their exports have risen to the highest levels in about three years. This continues the idea that China and much of Asia are in full recovery mode, and some analysts are even expecting an increase in jobs in the US during the month of March. In addition, the EU and Greece appear to be working out the Greek debt crisis. This still leaves a lot of question marks about the EU and about consumer demand in the US, although the S&P has risen back to near its January highs. Investors were sellers yesterday following nearly a week of successively lower highs in the May contract. Traders said that the push below the previous day’s lows generated a wave of selling by commission houses that helped to accelerate the losses as the day session progressed. The United States Trade Representative Ron Kirk said on Tuesday that he hopes the US can negotiate a settlement of the ongoing trade dispute with Brazil over US cotton subsidies. He noted that otherwise this would require negotiations with Congress on program changes in cotton. Deliveries against the March contract as of March 10th were 228 contracts, taking the total for the delivery period to-date to 4,118 contracts. Stocks registered for delivery against the ICE No. 2 cotton contract kept on rising yesterday, hitting 651,055 running bales versus the previous total of 630,905 running bales.

TODAY’S GUIDANCE: The cotton market relieved much of its pent-up selling pressure yesterday, but there is likely to be further selling over the short term barring a bullish surprise on today’s reports or a sharp drop in the dollar. Continue to look for a decline to near 79.00 in the May contract and possibly as low as 77.83. First support is just above 79.70 in the May contract with next support at 80.00 and then at 77.83. First resistance is at 81.82.

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Cotton is finally in the process of making its first correction to the sharp rally that started in early February. The correction started with yesterday’s long, slow retreat from the new high established in the May contract earlier in the session. This retreat accelerated overnight with the May contract losing 2 full cents at one point in the overnight session. This marks the biggest setback since the rally began on February 8th. However, losses in the nearby March contract have been much smaller than in the May contract, which maintains the bull spread tightness that has been a feature of the 2010 rally. The 2-day setback is not likely to be the start of a full reversal of the trend, however, merely a correction. It is also a signal that higher prices will at some point bring a scarcity of buyers, even in the export market where sales cooled to more moderate levels on last week’s Export Sales report reflecting the prices of two weeks ago. Traders will be looking closely at the next report on Thursday to see if sales will dip again and fall below the weekly average needed to reach the USDA’s export projection. That total is currently at 111,100 bales. May cotton made yet another new high for the year yesterday, moving to near 18-month highs in the process. The March contract led deferred contracts higher again yesterday, although it did so by a lesser margin that had been the case in some previous sessions, and this was followed by the setback into the overnight session. Weakness in some economic data related to jobs and housing in recent weeks may now get a closer look from cotton traders, with this Friday’s Unemployment number and Thursday’s Initial Jobless Claims possibly getting more attention from traders. Deliveries against the March contract as of March 2nd were 43 contracts, taking the total for the delivery period to-date to 3,355 contracts. Stocks registered for delivery against the ICE No. 2 cotton contract rose again yesterday to 556,846 running bales from the previous total of 552,817 running bales.

TODAY’S GUIDANCE: The May contract rallied nearly 17 cents without a significant correction over the past 4 weeks and price action over the past 24 hours indicates that the bull market in cotton will not be a complete runaway. The setback may take the May contract back into the range of support at 79.00 to 80.00 or perhaps as low as the January high at 77.83. However, this looks to be a buying opportunity in the May and July contracts with the longer term objective remaining near 90.00 cents in the May contract. First support is at 79.70 to 80.10 in the May contract. Light, near term resistance is at 82.45 to 82.50.

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The market continues to see a massive long liquidation sell-off and pushed to the lowest level since November for the October futures overnight. Open Interest peaked at 897,343 on February 4th and was 756,950 contracts yesterday. The market faces continued extreme tightness in the cash market for the next month or so but traders await a new harvest from Brazil soon. Traders believe the taker of the large deliveries may not have a home for the sugar which just added to the aggressive selling yesterday as a lack of interested new buyers in the cash market recently has been an added negative force. The real key to avoiding another world production deficit for the coming year will be weather for India and China as both regions have seen sub-par crops in the last two years and India saw an especially poor crop last year due to poor monsoons in June and July. The China sugar Association believes this years crop will be near 11 million tonnes from 12.43 million last year. This could leave a significant production deficit. May sugar collapsed to close sharply lower on the session yesterday and moved to the lowest level since early December with fund traders noted as aggressive sellers. Keep in mind; the combined spec net long position (small and large specs combined) as of February 23rd was still 186,603 contracts. This was down 22,219 contracts for the week but this is still a very large net long position. Traders indicate that the slow pace of demand in the past few weeks in the cash market and big deliveries against the March contract helped to pressure. The move under last weeks lows added to the bearish tone and sparked more selling. Deliveries came in at 11,951 contracts as compared with expectations for 5,000-10,000. Exports from Brazil for the month of February reached 979,900 tonnes, down from 1.289 million in January and up slightly from 940,700 tonnes in February of 2009. Ethanol exports were just 21,400 liters from 152,900 liters in January and down from 118,500 liters in February of 2009.

TODAY’S GUIDANCE: The market is still looking for a low enough price to find increased interest is sugar and speculative long liquidation selling could remain active.

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May cocoa’s chart remains weak and after yesterday’s downside breakout the market looks to be on track for an eventually slide to test the $2,750 price level. A good portion of yesterday’s selling in cocoa looked to be currency connected. Cocoa fell on arbitrage related selling tied to the Pound which slid to a 10 month low and was under pressure after a political poll suggested no UK party would win a majority in parliament in the upcoming general election. May cocoa may have some ability to bounce this session depending on the currency action, but in the early overnight action the Dollar has continued to gain against the Pound and Euro and that could keep cocoa under pressure. We still see the upside for cocoa limited by the market’s fundamental and technical setup which will leave downside price risk in place. May cocoa has fallen back from 30 year highs reached in January as it is becoming increasingly apparent that this season’s Ivory Coast crop will be larger than last year. The main Ivory Coast harvest is winding down and arrivals to ports are running 4.6% ahead of last season. While the Ivory Coast’s cocoa marketing body reported that the main crop cocoa harvest would likely end up below the 5 year average of 885,000 tonnes, traders seemed to be focusing on the fact that supplies will be bigger than last year given the improved prospects for the upcoming mid crop. After seeing a good mix of rain and sun over the last month some industry forecasters are significantly raising the outlook for mid-crop production and part of the liquidation selling seen in cocoa yesterday was certainly tied to the supply side news. Even the political situation in the Ivory Coast is calming down and that will remove a geopolitical threat from the cocoa market. While the supply outlook for cocoa has improved, sentiment in cocoa has been damaged by ongoing concerns that high sovereign debt levels in Europe and the UK will hinder the economic recovery in major chocolate consuming regions. ICE cocoa warehouse stocks stand at 4.363 million bags, up 32,751 bags.

TODAY’S GUIDANCE: Yesterday’s price action in May cocoa was technically bearish. Based on the contract low (November 2008) to high (January 2010) range, a 50% retracement comes in at $2,747 while a 61.8% retracement comes in at $2,566. With funds still holding nearly 28,000 contracts net long as of early last week, cocoa would seem to have ample selling capacity and that may push the market toward $2,750 before a significant technical bounce is seen. The May contract could trade as low as $2,566 if there is a bumper Ivory Coast mid-crop.

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The technical set-up remains bearish as high open interest, a very large net long position from fund traders and a long liquidation mode from trend-following funds helps drive prices lower. With the trend turning lower and trend-following funds net long 118,228 contracts, the selling intensified yesterday as last week’s lows were taken out. Ideas that the Brazil crop is coming along well and that the new crop supply will begin to ease the tightness on the world market helped to pressure. Traders see new crop hitting the market by late March and early April or sooner if the region turns dry. In addition, traders see the recent high prices as a reason to suspect declining global demand. May sugar closed sharply lower on the session with May futures driving down to the lowest level since December 22nd. The sharp drop in the open interest combined with a hefty net long position of funds has traders nervous over the potential for more long liquidation selling ahead. Last week’s indications of strong demand from India failed to support a resumption of the uptrend and the outside day down yesterday helped to spark more selling; especially when the market penetrated last week’s lows. The selling and the break stopped right on the 100-day moving average at 24.03 basis May futures. The market last closed under the 100-day moving average on December 9th. May sugar is now down as much as 18.1% off of the February 1st high. The key reversal on February 1st was confirmed as a top with a weekly key reversal for the week ending February 5th. A government panel on Friday indicated that India needs to urgently import 3-5 million tonnes. Lower than expected production from Mexico and increased demand from the US had traders looking for Mexico to import some sugar and export to the US. The International Sugar Organization revised their world production deficit forecast for the 2009/10 season to 9.4 million tonnes from 7.2 million previous. The deficit last year was 11.7 million tonnes.

TODAY’S GUIDANCE: The liquidation threat looks significant and the short-term trend looks down. Resistance for May sugar comes in at 24.40 and 25.03 with 23.07 as next objective.

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While May cocoa continues to trade within a well defined range, yesterday’s price action also shows a lack of strong speculative buying interest in this market. Cocoa fell despite a weaker trade in the dollar yesterday and it couldn’t attract strong enough buying interest to even lift the market back to resistance at $3,188. The latest COT report with options for cocoa shows speculators continuing to reduce their net long position, particularly managed money and trend following funds. May cocoa lacks upside traction even though there continues to be reports of more widespread and violent political protests in the Ivory Coast and that clearly shows the government upheaval isn’t thought to be a supply threat yet. Since the main harvest in the Ivory Coast is nearly complete and production continues to outpace last year’s levels, the political turmoil in the Ivory Coast has not become a bullish catalyst, especially since good growing conditions for the mid-crop leave the supply outlook favorable. It must have also been disappointing for the bull camp yesterday to see cocoa slump despite a major cash trading company predicting world cocoa demand to rise marginally this year. The London cocoa market is looking a bit shaky and overbought at these higher price levels following a sizable rally from the February low. If the London market starts to back peddle, it will likely end up being a factor that drags the NY cocoa market lower. ICE cocoa warehouse stocks stand at 4.227 million bags, up 84,887 bags.

TODAY’S GUIDANCE: The weaker trade in the Dollar overnight seems to be providing cocoa with some early price support. But so far the currency action hasn’t been enough of an influence to push May cocoa out of the $2,988 to $3,200 price range. Unless the political situation in the Ivory Coast begins to impact cocoa business, May cocoa appears to lack a bullish catalyst to support a significant move higher.

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The technical action is bearish and the market acts like it wants to make another leg down. However, the short-term cash fundamentals do not seem to point to lower prices until there is more certainty that there will be a bumper crop from Brazil this summer. Ideas that the sugar and coffee crops from Brazil for the 2010 season are doing well and that this will help ease any tightness in the world market helped to pressure. The Colombia National Federation of Coffee Growers indicated at production in the first half of the year should reach 5.156 million bags, up 22% from last year. This outlook clashes with trader expectations that Colombia coffee production will struggle to exceed last year’s level. El Nino dryness has already impacted production in January which was 515,000 bags, down 41% from last year and the lowest January production from Colombia in 34 years. May coffee traded sharply lower on the session and experienced the lowest close since February 5th. The market saw choppy to lower trade early in the session but when the sugar market saw a significant sell-off, coffee pushed under Friday’s lows and this sparked sell-stops and further technical selling. Funds were noted sellers on the session in coffee and soft markets in general which helped to pressure. Robusta futures pushed to a new 8-month low which added to the bearish tone. Vietnam cash markets are weak and traders appear un-concerned with developing dryness in some of the key growing regions. Concerns that the strong dollar, weak Brazilian currency trend will continue has added to the bearish tone. Daily ICE certified deliverable coffee stocks were down 4,985 bags yesterday to a 7-year low of 2.818 million with 29,171 bags pending review. This is the 6th session in a row in which stocks fell moderately and the movement could begin to provide some underlying support.

TODAY’S GUIDANCE: May coffee support is at the 130.90-130.35 zone with 139.50 and 141.70 as next key resistance points. If support can not hold, 127.70 becomes next downside count.

TODAY’S MARKET IDEAS: For now, assume support will hold and that we will see an eventual test of the 140.00 level.