The term “softs” refers to commodities which are identified as primarily tropical, such as coffee, cocoa, sugar, cotton, and orange juice. Their contracts are traded on the ICE (Intercontinental Exchange) based in New York. We will not discuss the thinly traded orange juice market; the lack of liquidity makes it inappropriate to be traded by anyone but a hedger. As a side note, I heartily recommend that all speculators watch the classic comedy movie “Trading Places.” It gives a hilarious though exaggerated look at the historic trading floor, where the various commodities were traded. I clearly remember the excitement on the trading floor the evening that it was filmed, when we saw actors Dan Akroyd and Eddie Murphy march onto the trading floor and make millions in orange juice futures while humiliating the trading family of Duke & Duke.
Cocoa
The world’s largest producers of cocoa beans are the West African nations of Ghana and the Ivory Coast. These two nations produce over 60% of world supplies.
Favorable weather conditions have produced expectations of a substantial global surplus in the current 2016/17 season, resulting in a sharp drop in prices since the second half of 2016. There are projections of a surplus of around 150,000 to 225,000 tonnes, with some forecasting a record crop. In fact, there was so much cocoa arriving at ports in the Ivory Coast that the infrastructure couldn’t cope. However, a disruption in price was caused by a two-day mutiny by the Ivory Coast Army, paralyzing parts of the country in the beginning of this year. The risk of political upheaval pushed up the price of cocoa. President Ouattara quickly reached a deal with the soldiers to avoid further escalation of the conflict. It became apparent that this unrest was unlikely to disrupt cocoa production, causing the price of cocoa to head back lower.
Also impacting the price is the weak British Pound following the Brexit vote. As the Pound declines in value, the price of cocoa in British Pound terms gets stronger, contributing to the weakness in the price of cocoa in Dollar terms. New York cocoa futures fell to their lowest in almost four years on Friday as a bearish stock report issued by the International Cocoa Organisation further heightened fears of an oversupply.
Coffee Arabica
At the close of 2016, arabica coffee futures crashed in anticipation of a bumper Brazilian crop. But recently it has become apparent that crop yields will not be as promising as previously assumed. Arabica beans might additionally be supported as buyers substitute arabica beans for robusta beans, as robusta beans are in really tight supply. Arabica typically trades at a significant price premium to robusta.
One key factor pushing up prices: the weather. Several years ago, coffee production fell when the weather pattern known as El Nino, known for producing above-average temperatures in the Pacific Ocean, led to droughts in both Brazil and Vietnam, the world’s top two producers. Continuing dry weather conditions in Brazil is starting to wreak havoc with the market, causing prices to rally over the last several weeks.
It seems that it is the speculators who have been pushing this market higher, as the coffee industry feels that it has been priced out of the market at these prices.
During the recent harvest season in Vietnam, the robusta coffee crop has been devastated by floods. This is normally their dry season. Instead, they’ve had rainfall up to five times the normal amount.
Cotton
China, India, the U.S., Pakistan, Brazil, Uzbekistan and Australia are the world’s leading cotton producers. They produce more than 90% of the world’s supplies, with China and India being the largest cotton consumers in the world.
After trading to all-time highs of $2.27 per pound in 2011, cotton prices collapsed, bottoming out at 56.00 in March 2016. The price of cotton has gradually been moving higher because of increasing export sales, and inventories have been on the decline.
The USDA reported on Thursday that cotton weekly export sales for the period ending January 19th totaled 457,000 bales. Sales were up 32 percent from the previous week and up 65 percent from the four-week average. This is the largest amount for this marketing year, pushing the market up 2 percent last week.
In the near future, prices will be influenced by several reports: on February 11, the National Cotton Council will report results of its planting intentions survey; the USDA will release its forecast on acreage intention on February 24; and the prospective plantings report is expected on March 31.
Sugar
Sugar prices are recovering following their December crash, but they continue to be volatile, with prices moving erratically on a regular basis.
This year, concerns of a cane shortage in India, the world’s second largest producer, sparked a substantial rally. Their new government’s reluctance to cut its production estimate and reduce import duties may reflect political concerns as it chases farmer votes in elections to be held in February.
The weather in Brazil and other sugar growing nations will determine whether the deficit condition worldwide continues. Brazil depends on its own sugar crop for the processing of biofuel. With the price of oil trading over $53 per barrel level, it is likely that domestic demand for sugar in Brazil will increase as the nation’s demand for sugar-based ethanol will move higher. Fundamentally, sugar is now looking a lot more bullish than it was a few months ago.
There are some important factors that will influence the market. We will soon have indications of delivery intentions against the March contract. This will determine the path of sugar prices during the month of February.
The China Factor
A surprise decision by the Chinese government to sell down their reserves of any of these soft commodities would profoundly affect market prices.