March coffee jumped to a new all-time high this week, driven by continued noncommercial buying.
Meanwhile, March 2025 sugar fell to a new contract low this week, putting it in the lower percentages of its price distribution range.
Both markets have bullish real fundamentals indicated by forward curves showing a solid backwardation (inverse).
I was originally going to write this piece about the coffee market given the nearby March futures contract (KCH25) jumped to a new all-time high of $3.4890 this week. To summarize the structure of the coffee market, strong buying from the noncommercial side continues to push contracts higher. The recent CFTC Commitments of Traders report (legacy, futures only) showed Watson (my name for the algorithm-driven part of the investment side of any market) held was net-long 77,642 contracts as of Tuesday, January 14, an increase of 8,508 contracts from the previous week. What stood out to me about coffee’s set of numbers is the noncommercial short futures position of 8,302 contracts was the largest since 6,299 contracts the week of April 19, 2011. The all-time mark is 5,405 contracts from the week of August 17, 2009. When a market sees the noncommercial side reach its extremes in terms of positioning, there is an increased chance of funds moving money out and looking for the next opportunity. Yes, coffee’s forward curve continues to show a backwardation (inverse) indicating bullish real fundamentals, but that curve has been weakening of late. That puts a brighter spotlight on the noncommercial side and raises the question of how much buying there might be at these new all-time high prices.
For the sake of this discussion, let’s say Watson is looking to pocket some of its return from being long coffee the past two years. For the record, the fund net-futures position posted a recent low of a net-short 26,745 contracts the week of January 17, 2023, when the nearby futures contract was priced near $1.5480. If Watson is satisfied by doubling its money in 2 years’ time, and rolls out of some of its positions, then it will be looking for the next market with similar potential.
As I discussed last September, the Softs sector looked to house most of the markets still showing bullish long-term supply and demand situations. At the time, the nearby March 2025 sugar contract (SBH25) was priced near 23.00 (cents per pound) while the March 2026 issue was near 20.00. A look at the forward curve in late January 2025 and we see the March 2025 issue is sitting near 18.60, after falling to a recent low of 17.57, while the March 2026 issue was priced near 17.50. Yes, the backwardation has weakened over the past 4 months (almost to the day), but as Dr. Seuss’ Horton the Elephant taught us, “A backwardation is a backwardation, no matter how small”, and backwardation in a storable commodity is always[i] bullish.
Taking another look at the Commitments of Traders report we see Watson was holding a net-long futures position in sugar of 14,162 contracts, though this was a decrease of 35,665 contracts from the previous week. This looked to be washout, or capitulation activity, driving the March futures contract into the lower percentages of its price distribution range over a variety of year lengths. Given this, Watson might evaluate coffee and sugar in this fashion:
- Fundamentals[ii]
- Overvalued/Undervalued
- Coffee is at its all-time highs
- Sugar is in the lower percentages of its 1, 3, and 5-year price ranges
The conclusion seems simple enough: Sugar looks to be an attractive market to move long-term investment money into while lessening the position in coffee. Watson should also consider both markets are weather derivatives at heart, and since Brazil is the largest producer and exporter of both coffee and sugar, the spotlight will continue to burn bright on that country’s weather patterns. For what it’s worth, La Nina conditions emerged in December 2024 (reportedly), with this general pattern being “warmer and drier conditions than usual” for South America. Again, though, this is a general statement as each year and/or pattern can be different.
[i] No, I’m not breaking the Vodka Vacuity (There are no Absoluts in markets) with this, but stating a fact. If a storable commodity has a forward curve in backwardation/inverse, its real supply and demand situation is bullish.
[ii] It should be noted Brazil is the world’s largest producer and exporter of both coffee and sugar, all while the real continues to hold near its all-time lows versus the US dollar.
[iii] The United States is the world’s largest importer of coffee, followed by Germany, France, Italy, and Canada.
[iv] The United States is also the world’s largest importer of sugar, followed by China, Indonesia, Germany, and the United Kingdom.
