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SOFTS-Sugar, cocoa drop in commodity sell off

Published 05/05/2011, 10:21 AM
Updated 05/05/2011, 04:24 PM
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* Sugar's ample supply prospects bearish

* Investors liquidate long positions in ICE cocoa

* Dealers expect arabica prices to fall in coming months

(Adds details, quotes, byline, updates prices)

By David Brough and Sarah McFarlane

LONDON, May 5 (Reuters) - Sugar and cocoa futures fell sharply on Thursday as the softs markets were caught up in a commodity-wide sell off.

Arabica coffee prices were also lower, consolidating below their 34-year peak.

World stocks and crude oil prices fell on Thursday after a report showed U.S. jobless claims unexpectedly jumped to an eight-month high last week, fuelling demand for safe-haven assets.

"The day's decline in agriculture is entirely related to broader markets," said Carsten Fritsch, commodity analyst at Commerzbank in Frankfurt, pointing to the sharp fall in oil and metal markets.

"Sugar was already in a downward trend and the commodity sell-off exacerbates this move."

Raw sugar futures slid almost 4 percent to fresh eight-month lows.

Upward revisions to estimates for Thai sugar output and ample supplies of new-crop centre-south Brazilian sugar weighed.

"From what I am hearing, the centre-south Brazilian harvest is going off pretty well," Keith Flury, soft commodities analyst with Rabobank, said.

"There doesn't seem like there is a lot that can push prices higher," he added, noting that robust demand for the sweetener was a supportive factor.

ICE May raw sugar futures were down 0.42 cent at 20.93 cents a lb at 1353 GMT, after falling to 20.50 cents a lb earlier in the session.

Flury said physical buyers appeared to be holding back, waiting for prices to fall further.

"There does seem to be a pent-up demand to increase inventories, but no one wants to buy to re-stock supplies," he said.

Dealers said they expected Egypt to return to the market soon with a substantial buying tender, possibly as soon as this weekend, having cancelled a tender for 200,000 tonnes of raw sugar earlier this week.

"The physical market will dictate how low the futures will go," said James Kirkup, head of sugar brokerage at ABN AMRO (Markets) UK Ltd. Liffe August white sugar fell $11.70 or 2 percent to $581.00 at 1354 GMT, just above the eight-month low of $571.90 hit earlier in the session.

COCOA DROPS

ICE cocoa futures fell sharply as investors liquidated long positions and hedging weighed.

"We've completely lost the upside momentum, there's weak long liquidation and hedging above the market," a London-based broker said.

"The whole commodity complex is coming under pressure."

ICE second-month, July cocoa was down $151 at $3,060 per tonne, while Liffe July cocoa was down 59 pounds or 3 percent at 1,886 pounds a tonne.

Dealers said that in the longer term, cocoa prices should be supported by market fundamentals following months of conflict in top producer Ivory Coast.

"The political crisis in Ivory Coast has not helped improving the husbandry," a second London-based broker said.

"The bull story is still there... big funds are square for the moment but they will have to make a decision and take a position. It's unlikely they will go short."

Arabica coffee futures fell, consolidating below the 34-year high hit earlier this week.

"Prices for coffee and cocoa have to some extent been speculator driven. For these markets, this was a correction that was due," Fritsch said.

Dealers said that historically high coffee prices are expected to trigger a supply response that will weigh on prices going forward.

"We see the arabica futures market falling to $2.20-$2.30 a lb in the next three or four months as funds and speculators liquidate positions in anticipation of a supply response next year," a Europe-based trader said.

"If you look at the rise in prices since the middle of last year, there's definitely an incentive for producers to increase plantings and the use of fertilizer and crop maintenance," the trader said.

Top coffee producer Brazil's harvest could also weigh on prices in the coming months, Rabobank's Flury said.

ICE July arabica coffee fell 6.0 cent to $2.8850 per lb at 1356 GMT, below Tuesday's 34-year peak of $3.0890.

Liffe July robustas were down $39 or 1.5 percent at $2,538 a tonne. (Editing by Anthony Barker)

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