Thursday 01 June 2023

The Mocha Frappe Index shows wobbly prospects for soft commodities

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SINGAPORE – The Mocha Frappe Index, made up of prices of what goes into your everyday mocha frappe — cocoa, sugar and coffee, does not look rosy. New York May cocoa futures, which traded above US$3,000 (S$4,205) per tonne in August last year, skimmed the low of US$1,869 early this month.

The Harmattan, a very dry and dusty wind from the Sahara, has been benign to the cocoa crops in West Africa and the current crop surplus is expected to be carried over to next season. Agricultural conditions in West Africa remain sufficient for an early flowering of the main cocoa crop, with harvest from September to October.

Increasing stockpiles at ICE Futures’ US warehouses with falling Ivory Coast exports highlight weakening demand. The mid-term trend for New York cocoa appears gloomy but the market looks supported at US$1,868.

This technical correction is likely driven by funds amassing record bearish bets. A short-covering rally last week spurred prices past US$2,000 but a solid recovery is still uncertain. Near-term support for May cocoa is at US$1,985 and US$1,942, with resistance at US$2,062 and US$2,097.

Raw sugar bulls ran out of steam as the March contract finally settled at 19.31 US cents per pound (0.45kg). The massive tender of the March contract, largely out of Brazil, indicated a weakness in the spot market and relieves concerns on the tightness of raw sugar supplies. A surplus sugar market is expected in 2017-’18 as La Nina passes, but the brunt of a possible El Nino weather pattern may change this.

For now, funds have begun to reduce bullish bets on raw sugar and the absence of any significant weather concerns out of Brazil’s southern cane region will limit any rallies. Support for May raw sugar is at 17.97 cents and 17.75 cents, with resistance at 18.57 cents and 18.85 cents.

Arabica coffee is no different, as a bumper Brazilian Arabica crop last year has been weighing on prices. The contract for May delivery traded up to US$1.8165 per pound in November, before settling at US$1.4235 on March 13. Despite increasing inventories at ICE-monitored warehouses and bearish bets by funds, coffee found support at the psychological level of US$1.40.

Last month, producers exported 15 per cent less coffee than they did the year before as prevailing prices were not enticing enough. A rallying Brazilian real against the US dollar further reduces the appeal for farmers to export. A lack of substantial weather news could put the coffee market in limbo, although it can be prone to sharp corrections. Near-term resistance for May Arabica coffee is at US$1.4390 and US$1.4585, with support at US$1.3935 and US$1.3750.

The Mocha Frappe Index seems to be holding ground, however, as these commodities are predominantly denominated in US dollars and the strengthening of the greenback could limit rallies. Nevertheless, it will be a weather play in the coming weeks and the volatility of soft commodities should never be underestimated.

Wilfred Chong

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