Market Insights Week of July 15, 2024

Market Insights Overview: Descartes Labs' advanced geospatial insights uses quantitative models for the most accurate price forecasting, and involves a rigorous process from a broad library of forecasts in agriculture/industrial production, weather and human activity. In this blog, we provide you insights on the current week's market.

*Disclaimer: This blog post and related information is provided by Descartes Labs, Inc. (“Descartes Labs”) and was prepared solely for informational purposes. It is based upon or derived from information generally believed to be reliable, but no representation is made that it is accurate or complete. Descartes Labs accepts no liability with regard to the use of or reliance on it, and it should not be taken as investment, trading, or other advice.

Macro

Last Thursday and Friday, the dollar index fell and posted a 1-month low. The dollar retreated Thursday after the weaker-than-expected US June CPI report bolstered speculation the Fed will be able to cut interest rates this year.  Also, dovish comments Thursday from San Francisco Fed President Daly weighed on the dollar when she said recent data warrant a Fed rate cut. A supportive factor for the dollar was Thursday’s weekly jobless claims report that showed weekly US jobless claims fell to a 6-week low, a sign of strength in the labor market that is hawkish for Fed policy.

US June CPI eased to +3.0% y/y from +3.3% y/y in May, better than expectations of +3.1% y/y.  The June CPI ex-food and energy eased to a 3-year low of +3.3% y/y from +3.4% y/y in May, better than expectations of no change at +3.4% y/y.

US weekly initial unemployment claims fell -17,000 to a 6-week low of 222,000, showing a stronger labor market than expectations of 235,000.  Weekly continuing claims unexpectedly fell -4,000 to 1,852 million, showing a stronger labor market than expectations of an increase to 1.860 million. 

San Francisco Fed President Daly said, "With the information we have received to date, which includes data on employment, inflation, GDP growth, and the outlook for the economy, I see it as likely that some policy adjustment will be warranted." On the other hand, St. Louis Fed President Musalem said Thursday's June CPI report was "encouraging," but he "will be looking for more evidence that inflation can be expected to converge to 2% going forward."

The market is pricing in two rate cuts by the FED by the end of the year.

Grains

The USDA WASDE July report was published on July 12th and Brazilian CONAB July report on July 11th, providing a set of fresh numbers to the grains community. As typical for a WASDE July report, the yield estimates for corn and soybeans 24/25 crop were left unchanged from June while the production numbers would use the planting area survey results from June.

• Corn: As expected, the yield for 24/25 was unchanged at 181 bu/acre, leading to a corn production number of 15.1 Bn bu vs 14.86 Bn bu in the June report, with the increase attributable fully to the increasing planting acreage for corn. Yield will likely be updated in August based on the first survey data available. It is worth mentioning that despite the heat, the rain had improved the drought situation widely. Just 7% of U.S. corn areas are in drought as of this week compared with 64% a year ago. Of the past decade, only 2015 and 2019 had less drought coverage in corn areas this same week versus 2024.
  
  Nevertheless, U.S. corn ending stocks came in well below expectations on a large increase in old-crop use. From ending stocks  of 2.022 Bn bu, the new number dropped to 1.877 Bn bu. It appears those old crop changes stemmed from the June 1 stock survey results and a sufficient export book. As a result, we saw a decrease in World Ending Stocks for corn from 312.4 mmt to 309.13 for the 23/24 crop between June and July report and an increase for the next crop from 310.77 mmt to 311.64 mmt in the July report.

Conab increased Brazil's corn crop by 1.7 mmt from last month on an improvement in the 2nd harvest for a total of 115.86 mmt vs 114.14 mmt. Total corn production will be 12% smaller than last year. Corn exports were unchanged this month. On its side, USDA did not adjusted its number and kept Brazil corn at 122 mmt for the 23/24 crop.

Last week Descartes Labs forecast had been bearish for corn, anticipating a sell-off below 400 cts/bu by July 14 which did happen. The outlook is flattish short term before continuation of the sell-off.

• Soybean: The month on month adjustments were even smaller for the soybeans balance. Talking about production first, yield was left unchanged at 52 bu / acre and the 24/25 production penciled in at 4.435 Bn bu vs 4.45 in June report. The small adjustment down is related to lower planting area published in the June survey. The 23/24 ending stocks were almost unchanged in this July report while the 24/25 ending stocks were adjusting down slightly to account for the lower production, coming off from 0.455 Bn bu in June report to 0.435 Bn bu in the latest report.

Once again, on the topic of Latam production, the gap between USDA and CONAB on soybean production remained wide since USDA kept their estimate unchanged at 153 mmt vs the almost unchanged 147.4 mmt from CONAB.
Positioning remained very short for both corn and soybeans, at record level even below the February/March levels seen earlier this past year.

As can be seen on the price chart, the small support added to prices from the heat event than blanketed the US at the end of June, early July quickly evaporated, bringing the soybean Sept-24 contract to new lows close to 1050 cts/bu.

• Soybean meal: The sell-off initiated in soybean-meal initiated in July continued without respite over the first half of July. The old crop - new crop spreads stayed backwardated while the new crop curve is pricing anticipations of a fairly loose supply demand balance for soybean meal from October 2024 onward. 

The Descartes Labs forecast last week anticipated some short-term mild weakness before rebounding to the levels of July-24 contract around 360. The sell-off observed was much more acute than anticipated and the outlook is now moderately bullish with a rally toward 330 $/ST expected over the coming two weeks.

• Wheat: Wheat saw the largest surprise in the July WASDE report last Friday, with a significant jump in the expected production number. Indeed, the All Wheat category production estimate breached the 2 Bn bu threshold to reach 2.008, up from 1.875 in June report and well abound the trade estimates around 1.91 Bn bu. This increase was reflected by all wheat categories. As a result, the US ending stocks jumped from 0.758 Bn bu in the June report to 0.856 Bn bu in July report. World ending stocks were also revised higher. Not surprisingly, given this large bearish surprise, wheat prices - and especially Chicago wheat - got revised down on Friday, bringing the price from most contracts back to the lows of early March 2024.
  
  

Vegoils

• Soybean-oil: At the end of June, soybean oil price benefited from the support in soybeans price coupled with the supported palm oil market as India imports were reaching seasonal highs. However, a correction occurred in both markets as the higher than expected inventories number from Malaysia weighed on the market.

After the rally at the end of June/early July, the forecast last week was moderately bearish looking at price correcting to 48 cts/lb. The weakness from last week was much more acute. From those 46 cts/lb levels, the outlook is flattish to slightly bullish. 

• Canola: 

• Palm-oil: Malaysian palm oil futures ended lower on Friday, as estimates of higher inventories in June weighed on prices, with the contract snapping two consecutive weekly gains. The benchmark palm oil contract FCPOc3 for September delivery on the Bursa Malaysia Derivatives Exchange lost 21 ringgit, or 0.53%, to settle at 3,914 ringgit ($847.08). For the week, the contract fell 3.1%.
  
  Palm oil prices dropped due to higher inventories in June, but expectations that exports would pick up in July provided support, a Mumbai-based trader said. Malaysia’s palm oil stocks at the end of June rose 4.35% from May to 1.83 million metric tons, the highest since February, the Malaysian Palm Oil Board (MPOB) said on Wednesday. The MPOB attributed the rise in stocks to a steeper decline in exports compared with production. Crude palm oil production declined 5.23% from May to 1.62 million tons, while palm oil exports plunged 12.82% to 1.21 million tons.

India's palm oil imports in June rose to hit the highest level in six months on robust demand from refiners for upcoming festivals.

Crude palm oil prices are expected to remain supported by tighter production conditions and strong demand from top buyers India and China, state agency Malaysian Palm Oil Council (MPOC) said.

In line with soybean oil, after the rally at the end of June/early July, the forecast last week for CPO was bearish, forecasting price to come back below 4000 myr/mt for the Oct-24 contract, in line with the price move observed. Latest outlook sees the recent price as a bottom and anticipates a rebound from 3900 to 4000 myr/mt.

Softs

• Sugar: Raw sugar . Sugar prices Friday extended this week's decline, with NY sugar dropping to a 2-1/2 week low.  Robust sugar output in Brazil is bearish for prices after Unica reported Thursday that Brazil's sugar production for the 2024/25 crop year through June was up +15.7% y/y at 14.2 MMT.  Also, the percentage of Brazil's 2024/25 sugarcane crop crushed for sugar rose to 48.72% from 47.69% last year.  

Descartes Labs forecast last week for raw sugar was range bound between 20-20.5 cts/lb. Oct-24 broke below 20 cts/lb to 19 cts/lb instead. The current outlook is for a rebound back above 20 cts/lb by August.

White sugar: The outlook for above-normal monsoon rain in India to boost sugar India's sugar output is also bearish for prices.  The Indian Meteorological Department reported Monday that India received 225.7 mm of rain during the current monsoon season as of July 7, up +2% from the comparable long-term average of 221.6 mm.

Sugar prices are also under pressure after the Indian Sugar and Bio-energy Manufacturers Association (ISM) on July 3 reported India's 2023/24 sugar reserves at 9.1 MMT and reported a surplus of 3.6 MMT.  The group also urged the government to allow increased exports of surplus sugar.  India has restricted sugar exports since October 2023 to maintain adequate domestic supplies. 

Descartes Labs forecast last week for white sugar was also range bound around 575 $/MT. Despite the sell-off to 550 $/MT, the outlook remains range bound.

• Cocoa: Cocoa prices today are moderately lower after the Ivory Coast cocoa regulator said Thursday it had resumed some forward sales for the 2024/25 cocoa crop to buyers with domestic processing plants.  Due to production concerns, The Ivory Coast six months ago halted forward sales of the 2024/25 Ivory Coast cocoa crop.
  
  On Thursday, cocoa prices rallied to 2-week highs on signs of more robust global cocoa demand. The European Cocoa Association reported Thursday that Q2 European cocoa grindings unexpectedly rose +4.1% y/y to 357,502 MT, versus expectations of a -2% y/y decline.  Losses in London cocoa accelerated today after the British pound (^GBPUSD) rallied to an 11-1/2 month high.  The stronger pound undercuts cocoa priced in terms of sterling.

Lower cocoa production in the Ivory Coast, the world's largest producer, is bullish for prices. Government data Monday showed that Ivory Coast farmers shipped 1.61 MMT of cocoa to ports from October 1 to July 7, down by -29% from the same time last year.  Trader Ecom Agroindustrial projects Ivory Coast 2023/24 cocoa production, which ends in September, will fall -21.5% y/y to an 8-year low of 1.75 MMT.  

Higher cocoa futures margins have forced traders to reduce their cocoa positions, which has led to thin trading conditions and high volatility.  Aggregate open interest in cocoa futures is now near the lowest since 2010.

US cocoa supplies have tightened.  ICE-monitored cocoa inventories held in US ports fell to a 3-1/2 year low Wednesday of 3,111,890 bags.

Last week Descartes Labs forecast for London cocoa was moderately bullish, anticipating a rally from 6,350 to 6,800 gbp/mt. The market rallied even faster to 7,000 gbp/mt before dropping on Friday. The outlook from the model is now more range bound, anticipating the Sep-24 contract to rebound above 7000 gbp/mt by the end of the month after a short consolidation around the current level. 

• Coffee: Arabica. Coffee prices are seeing support from a lack of producer selling as Brazilian coffee farmers hoard beans in anticipation of higher prices. Coffee prices have rallied sharply this week, with Sep arabica and robusta posting contract highs on Thursday due to concern that drier-than-normal conditions could adversely affect Brazil's and Vietnam's coffee crops.  Somar Meteorologia reported Monday that Brazil's Minas Gerais region received 1.3 mm of rain last week, or only 24% of the historical average.  Minas Gerais accounts for about 30% of Brazil's arabica crop.  Also, the National Oceanic and Atmospheric Administration (NOAA) said that despite recent rain, some coffee producers in Central America still face a moisture deficit following a drought at the start of the season. 
  
  

Last week Descartes Labs Arabica forecast was directionally bullish albeit with very moderate conviction. The rally observed was definitely much stronger than anticipated. The most recent outlook anticipates a correction from the current level of Sep-24 contract around 250 cts/lb back towards 240-242 cts/lb.

Robusta:   Nearest-futures robusta coffee rose to a record high on Tuesday due to smaller coffee supplies from Vietnam.  The General Department of Vietnam Customs reported Tuesday that Vietnam's June coffee exports fell -11.5% m/m and -50.4% y/y to 70,202 MT, the smallest amount of coffee exports for the month of June in 13 years.  Also, Vietnam's Jan-June coffee exports were down -11.4% y/y at 893,820 MT. 

Last week Descartes Labs Robusta forecast was also directionally bullish but expected the price move to occur a little bit later. The speed of last week move is making the most recent forecast trajectory much more dynamic, with the potential for a rapid correction followed by a more sustained rally towards 4700 $/MT. 

Energy

• Crude oil : Crude price corrected down last week, as it became more evident that the Beryl storm impacts on the Gulf of Mexico coast would not impact crude production. In addition, WTI faced some pressure from its Brent counterpart as a potential ceasefire in Gaza was getting negotiated. Note that despite the correction in crude flat price, the calendar spreads on the prompt of the curve strengthened over the week and appear to be pricing more than the upcoming summer withdrawals.

• Gasoline: The premium in gasoline cracks that was added in the first week of July as Beryl was threatening US Gulf of Mexico refineries got removed quickly early last week, as negative demand impact, relatively muted impact on refineries and a disappointing demand number from EIA failed to justify that premium.

• Diesel/Gasoil: Similarly to gasoline, the gasoil and diesel prices were under pressure from their own fundamental and the underlying weakness in crude.
  
  
  
  
• Natural gas: The negative demand impact from the storm Beryl, the continuous supply are keeping the natural gas market under pressure, especially the remaining summer contracts.

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