Rabobank issued a caution to cotton bulls, and cocoa bears, even as it raised its forecast for prices of the fibre, citing unexpectedly-strong Chinese demand, and lowered its projection for futures in the bean.
The bank lifted its forecast for New York cotton prices up to September, saying that the "pace and volume of China's cotton imports has exceeded our expectations during 2012-13 to date"
"Chinese import demand spiked in December and January at 2.4m tonnes and 2.1m tonnes respectively, driving the market to rally," the bank said.
However, the upgraded forecasts remained well below the futures curve, with the bank questioning for how long the uptick in purchases by China - the top importer, but which has massive domestic stocks - can last.
'Above fair value'
"As we are now past China's seasonal trade peak, the pace of imports should slow in coming months, easing pressure on prices," Rabobank said.
"We anticipate a reduction in Chinese demand due to high domestic stocks and government restrictions on imports."
Furthermore, while international prices have rallied strongly over the past four months – by some 25%, on a front contract basis – China's prices, while remaining higher thanks to a government support programme, have plateaued, reducing their premium and the incentive to import.
"The [New York] market is trading above fair value and highlights the risk of a potential sell-off, particularly if non-commercial investors choose to unwind their gross longs in the July contract rather than rolling it into December."
Cocoa prospects
Conversely, while Rabobank reduced its forecasts for cocoa prices, the projections remained above the curve of futures in both New York and London.
The downgrade reflected "strong" data on port arrivals of beans in Ivory Coast, the top producing and exporting country, besides the need for West African producers to fix prices, meaning substantial selling pressure ahead.However, the bank said that the outlook for the Ivory Coast mid crop harvest, which starts next month, was "mixed, with high pod counts suggest good supply, but dry conditions potentially stressing trees".
And further ahead, the impact of lower cocoa prices - which on a front futures contract basis have set 10-month lows in New York this week, and hit their lowest in nearly 14 months in London – will feed through into depressed output.
'Prices to rise'
The lower prices have been "reducing the incentive to produce cocoa", encouraging farmers to scrimp on use of fertilizers and pesticides to boost yields.
If world output stays flat for a second season in 2013-14, against a backdrop of rising demand, "the production deficit will grow and terminal prices will react.
"With expectations of falling inventories, industry and speculator buying can be anticipated," Rabobank said.
"As fundamentals tighten, we expect the market to transition and prices to rise."
