Commodity outlook: Short-term indicators turn bullish for edible oils

Outlook on edible oils, cotton, sugar

EDIBLE OILS:

Markets have been firm due to positive cues from key soybean contracts on the Chicago Board of Trade. Soybean futures on the Chicago bourse rose due to concerns about a smaller crop in Brazil, the world's second-largest producer, following a spell of dry weather.
 

Soyoil futures on NCDEX, too, rose in line with those of crude palm oil. Prices of soyoil and crude palm oil typically move in tandem because they are used as substitutes for each other. Chinese demand for palm oil, which solidifies in cold weather, tends to rise towards mid-year as the weather warms. Leading analysts forecast at the conference in Kuala Lumpur that palm prices would rise in the coming months, as production and stocks fall in line with a seasonal trend.  

If the weather in India is favourable during the next 1-2 months, Rabi crops are expected to be more than last year; accordingly, mustard-seed output in the 2018-19 season would be highest in last four years.

PRICE DIRECTION

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Charts have turned increasingly friendly for the edible oil complex and bottoming signs have been prevailing from the month of November 2018 itself. In our previous update, we had cautioned about a possible move above 2135 MYR/ton levels in BMD being a sign of a bullish reversal. Such a move, having taken place, is expected to have bullish implications in the near-term with potential targets around 2420 MYR/ton, being a fibonacci retracement level. Supports are now seen at 2250 followed by 2220 MYR/ton levels in BMD.

The Elliot wave structures are hinting a possible corrective up move ( wave "B") towards 2420 or even higher to 2500MYR/ton levels within a bearish impulse. The wave "A", began at 3,200 MYR/ton around December 2016 and ended at 1940 MYR/ton on November 2018. A larger decline in the form of wave "C" can happen post the current rally in prices to 1800 MYR/ton or even lower. In the short-term indicators and other technical parameters favour a bullish market for edible oils, but there is no need to get carried away.  

COTTON:

Cotton prices were depressed due to the subdued spot demand. Moreover, reports of faltering US-China trade talks and weakness in grain and oil markets weighed on the prices.
 

Notwithstanding the volatility in the Indian rupee against the US dollar during the current year, the sharp rupee depreciation between July and October 2018 also supported spinners’ INR realisations and hence contribution margins. Export demand has reduced as Indian cotton has turned more expensive than that in the international market. Now, only mills are buying as per their hand to mouth requirements. 

Meanwhile, the Cotton Association of India (CAI) has released its December estimate of the cotton crop for the 2018-19 season. It has revised the estimate to 33.5 million bales, 1.54 per cent lower than its previous estimate of 3.40 million bales. The higher MSP by the government this year has not had any meaningful impact on domestic prices yet.

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PRICE DIRECTION

The technical analysis points to more weakness ahead for prices in the coming weeks. Certain key supports have been violated in ICE Cotton, the benchmark for global cotton prices, and the market is vulnerable for further declines from here towards 65-66c levels. We expect prices to hold here and find support once again.

SUGAR FUTURES NY # 11

Sugar futures have been volatile lately thanks to lower oil prices and a wobbly economic environment. Oil prices fell nearly 2 percent on in the week over concerns the world's stumbling economy could pinch fuel demand as U.S. shale fields surge and cuts by Russia come in below expectations. Lower oil prices can diminish the competitiveness of cane-derived ethanol in Brazil, raising the possibility of mills increasing the amount of cane used to make sugar.

Indian Sugar Mills Association (ISMA) has lowered India's 2018-19 sugar production estimate by 2.5% to 307 lakh tonnes from the first advance estimate of 315 lakh tonnes issued in October 2018.  As per second advance estimates of ISMA, Maharashtra is expected to produce lakh tonnes in 2018-19 SS, which is the same as the first advance estimates made by ISMA in September 2018. In 2017-18 SS, Maharashtra had however produced 107.23 lakh tonnes. The other major sugar-producing State viz. Karnataka is expected to produce 42 lakh tonnes of sugar in 2018-19 SS, against 37.52 lakh tonnes produced in 2017-18 SS.
 

Till 15th January 2019, Karnataka has produced 26.76 lakh tonnes of sugar with 65 sugar mills in operation. As per the second advance estimates, the other States viz. Tamil Nadu, Gujarat, Andhra Pradesh & Telangana, Bihar, Punjab, Haryana, Madhya Pradesh & Chattisgarh, Odisha and Uttarakhand are expected to produce 62 lac tons, which is about 2.5 lakh tonnes more than last season's production from these States.

Considering the trend of sugar exports, it is expected that sugar mills could be able to export more sugar in 2018-19 against the allocated MIEQ of 50 lakh tonnes. 

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PRICE DIRECTION

New York sugar futures # 11, have been in a broad consolidation phase for the past few months after it hit a decade low in September 2018. The direction is still pointing towards the upside in the coming months with significant resistance kicking in at $15 levels. It needs significant bullish triggers to surpass this level in the coming months.

(The author is the Director of Commtrendz Research and these are only guidance for price direction. He is not liable for any gain/loss arising out of it. He can be reached at gnanasekar.t@commtrendz.com.)