October cotton prices rallied to a new 22-month high. Bullish factors included (1) hot, dry weather in the Mississippi River Delta and Southeast that may damage cotton drops, with rain in the Delta running 20% below the long-term average, and (2) the 95% plunge in cotton inventories monitored by the ICE exchange since June 2 to the lowest level since December 2004. The US cotton crop continues to develop ahead of schedule with 58% of the crop setting bolls versus the 5-year average of 48%. The US cotton crop as of July 25 was in 68% good-to excellent condition (unchanged w/w and +22 pts y/y). Weekly US cotton exports (July 22) were 303.5 thousand running bales; cumulative 2009/10 (Aug-July) exports were down -13% y/y.

Fundamental Outlook-Bullish -Cotton fundamentals remain bullish with strong demand, with a sharp decline in ICE cotton inventories, and with hot weather in key US cotton growing areas. The 2010/11 global cotton crop is expected to rise 11%, but due to strong demand, global ending stocks are expected to fall to a 7-yr low of 49.59 MT. The stocks-to-use ratio is expected to fall to a 16-year low of 44.8%.

Cotton Supply/DemandUSDA (June 10):
2010-11 US production 16.7 mln bales (+37% y/y), 2010-11 US carry-over 3.0 mln bales (-3.2 y/y and 15-yr low), 2010-11 global carry-over 50.13 mln bales(-5% y/y).

SUGAR

October sugar prices rallied sharply to post a new 4-month high. Bullish factors included (1) a near-term shortage of sugar due to export constraints in in Brazil, which accounts for 54% of the world's sugar exports, after its six main sugar export ports had a record 115 vessels delayed as of July 27 due to heavy rains, and (2) India's monsoon rainfall running 15% below normal levels. The harbor delay problem in Brazil became even worse in the latest reporting week and is likely continue since forecasts call more rain starting August 1.

Fundamental Outlook-Near-term Bullish-Sugar prices have recovered sharply in the past 2 months on short-covering, some questions about supply, and inventory rebuilding by sugar consumers, compounded more recently by the harbor shipping delays in Brazil. However, the sugar supper picture remains adequate with ISO forecasting a 2.5 MMT global sugar surplus for 2010/11 after two years of deficits. The USDA is forecasting a sharp 7.9% rise in 2010/11 global sugar production versus a rise of only +2.6% y/y in consumption.

Sugar Supply/Demand
USDA: 2009-10 world production 153.5 MMT (+6.7% y/y vs 143.8 MMT in 2008-09), consumption 153.7 MMT (-0.4% y/y from 154.4 MMT in 08-09), ending stocks 26 MMT (-5.7% y/y from 27.6 MMT in 08-09).

Sep coffee prices have rallied sharply in the past week and are now trading just below last month's 12-year high. Bullish factors include (1) hedge fund buying and the weak dollar, (2) tight supplies as coffee inventories monitored by ICE have fallen -30% this year to an 8-year low, and (3) ICO's recent prediction that 2010 global coffee exports will drop below last year's 95.5 mln bags amid "scarcity." Bearish factors include (1) ICO's estimate for Brazil's coffee output to rise to 50 mln bags in the year starting Oct 1, up +27% y/y, and (2) ICO's prediction that global coffee output may rise 12% to 135 mln bags next season.

Fundamental Outlook-Bullish-Coffee prices are just below the recent 12-year high on tight supplies combined with strong consumption and lagging production. Coffee production in 2009/10 fell -5.9% y/y to 120.6 mln bags (ICO), but production should rebound to 133-135 mln bags in 2010/11 (ICO). Brazil's 2010/11 (July-June) production will rise 23% y/y to 55.3 mln bags on their favorable 2-yr cycle (USDA).

Coffee Supply/Demand

USDA: 2010-11 world coffee production a record 139.7 mln bags (+11% vs 2009-10's 125.7 mln bags); 2010-11 consumption 131.5 mln bags (+2.2% vs 2009/10's 128.7 mln bags); 2010-11 world ending stocks at 36.3 mln bags (+16% vs 2009-10's 31.3 mln bags); exports 103.4 mln bags (+5.2% vs 2009/10's 98.3 mln bags); 2010-11 stocks/use 27.6% (vs 2009-10's 24.3%).

COCOA

Sep cocoa prices are now trading near the middle of the 2-month trading range as the market settles down after the recent big cocoa purchase in London by a hedge fund. The Liffe exchange after an investigation said it found no evidence of "abusive behavior" or trading with the "specific purpose of distorting the price" of the July futures contract, which has since expired. The cocoa market continues to see good demand with Q2 North American cocoa grindings rising +12% y/y and with ICE cocoa inventories headed generally lower.

Fundamental Outlook-Mildly Bullish-Cocoa fundamentals are mildly bullish with ICCO forecasting a small 69,000 MT production/consumption deficit in the current 2009/10 (Oct-Sep) marketing year. World cocoa production in 2009/10 is little changed year-on-year at 3.596 MMT, which is well below the record high of 3.786 MMT in 2005/06. Demand in 2009/10 is up 4.0%, leading to a 4.1% y/y drawdown in ending stocks to 1.619 MMT. That leads to a tight stocks/consumption ratio of 44.6%, down from 48.4% in the previous year and well below the 10-year average of 47.1%.

Coffee Supply/Demand

USDA: 2010-11 world coffee production a record 139.7 mln bags(+11% vs 2009-10's 125.7 mln bags); 2010-11 consumption 131.5 mln bags (+2.2% vs 2009/10's 128.7 mln bags); 2010-11 world ending stocks at 36.3 mln bags (+16% vs 2009-10's 31.3 mln bags); exports 103.4 mln bags (+5.2% vs 2009/10's 98.3 mln bags); 2010-11 stocks/use 27.6% (vs 2009-10's 24.3%).

Cocoa Supply/Demand Summary

International Cocoa Organization (3-Mar-2010): 2009/10 (Oct-Sep) gross crop 3.597 MMT +1.0% y/y; grindings 3.579 MMT +2.5% y/y, deficit -18,000 MT (vs 32,000 MT surplus in 2008/09), ending stocks 1.593 MMT (-18,000 MT from 1.611 MMT in 2008/09, 44.5% stocks to grinding ratio (vs 2008/09 46.1%).

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