SocGen wary on cotton, slashes coffee price hopes

Societe Generale began coverage of cotton futures with a caution of modest price falls as it revealed dim hopes for soft commodity prices, slashing forecasts for arabica coffee and foreseeing little chance of a sugar revival.

The bank, as it cut forecasts for soybean prices but lifted hopes for grains, initiated coverage on cotton "with a downside bias", cautioning over the potential for output to beat investors' expectations.

In India, the best start to the monsoon season in nearly 12 years had raised production hopes for the second-ranked producing country, while there was still hope for a recovery in the US, the top exporter, too.

Although poor summer conditions which brought parts of Texas, the top producing state, too little rain, while areas further east have suffered inundations, the late planting of the US crop, thanks to a wet spring, supported hopes for a revival.

'Still potential'

"There is still potential for an abundant US cotton crop," provided autumn weather proved benign, Societe Generale analyst Christopher Narayanan said.

SocGen estimates for cotton futures

Q3 2013: 81 cents a pound

Q4 2013: 84 cents a pound

Q1 2014: 76 cents a pound

Q2 2014: 78 cents a pound

Price for quarter average, New York spot contract

"The likelihood remains for a better-than-forecasted US cotton production year and prices to fall below the current forward curve at the time of this writing."

The comments follow a mixed reception by investors to revisions by the US Department of Agriculture on Thursday to its cotton estimate, lowering its estimate for domestic production in 2013-14, but cutting its forecast for exports by further.

On the world balance sheet, the USDA nudged higher its production outlook, and raised its forecast for year-end stocks by nearly 1.0m bales.

"In contrast to the relatively tight US cotton balance sheet, global supplies remain uncomfortably large," Luke Mathews at Commonwealth Bank of Australia said.

Output rises

SocGen also cut its forecast for arabica coffee prices, reflecting strong harvests in Brazil and Colombia, which have more than offset the dent to production from the outbreak of rust in central America.

SocGen estimates for arabica coffee futures, (change on previous)

Q3 2013: 115 cents a pound, (-42 cents a pound)

Q4 2013: 118 cents a pound, (-36 cents a pound)

Q1 2014: 120 cents a pound, (-39 cents a pound)

Q2 2014: 127 cents a pound, (n/a)

Price for quarter average, New York spot contract

"Looking ahead, we do expect to see an eventual tightening of the global surplus," Mr Narayanan said.

"However, with the next crop year being an 'on year' for Brazilian coffee production, this tightening will not be seen until the 2015-16 marketing year, barring any significant drop in Central American coffee production due to leaf rust disease."

The comments follow downbeat talk from Goldman Sachs last week over the prospect of a revival in arabica prices.

Demand question

SocGen lowered its forecast for sugar prices too, although to levels a little above the futures curve.

SocGen estimates for raw sugar futures, (change on previous)

Q3 2013: 17.7 cents a pound, (-0.8 cents a pound)

Q4 2013: 16.8 cents a pound, (-0.4 cents a pound)

Q1 2014: 17.7 cents a pound, (-0.7 cents a pound)

Q2 2014: 18.8 cents a pound, (n/a)

Price for quarter average, New York spot contract

"Strong" Brazilian production - encouraged by a weak real which is boosting the appeal of making sugar, a major export, rather than ethanol from cane has "continued to plague sugar prices", the bank said.

And the prospect of "the fourth global surplus in as many years continues to weigh on the market".

However, the bank acknowledged that "falling prices in large consuming countries and regions such as the EU and India may spur additional demand".

In China, "demand has remained reasonably robust, except in June.

"While stocks there appear to be ample, disappointing 2012-13 production, following unfavourable weather, has helped to keep demand there strong."

The comments come amid a debate on sugar demand, sparked by comments from Czarnikow that consumption is greater than has been realised, which fuelled a record bullish shift by hedge funds in their positioning on raw sugar futures and options.

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