Soft commodities are agricultural products that tend to grow in tropical climates. Brazil is the world’s leading producer of the world sugar and Arabica coffee futures. Brazil is also the leading global orange producer that impacts the ICE frozen concentrated orange juice futures. India, China, and the U.S. lead the world in cotton output. Meanwhile, the Ivory Coast and Ghana produce over 60% of the world’s cocoa beans, the primary ingredient in chocolate confectionery products.
The soft commodities sector rose 1.79% in Q2, with three of the five members moving higher. Over the first six months of 2023, three of the five soft commodities posted double-digit percentage gains, with coffee and cotton futures moving under 4% lower.
Sugar gains in Q2, adding to Q1 gains
ICE world sugar #11 futures rose 2.43% in Q2 and moved 13.72% higher over the first half of 2023.
The chart highlights sugar futures rose to 27.41 cents per pound in April 2023, the highest price since October 2011. Nearby sugar futures settled at 22.79 cents per pound on June 30, 2023.
Coffee falls in Q2, adding to Q1 losses
Coffee futures reached the highest price since 2011 in February 2022 when the nearby ICE Arabica contract rose to $2.6045 per pound.
The chart illustrates the correction in coffee futures that took the price to a $1.4205 per pound low in January 2023. In Q2, nearby coffee futures fell 5.57% and were 3.77% below the December 30, 2022, closing level on June 30, 2023, at $1.6100 per pound.
Cocoa leads the sector higher in Q2
Cocoa, the soft commodity that comes from West Africa and other equatorial climates, led the soft commodities sector higher in Q2 with a 13.13% gain. ICE cocoa futures moved 27.62% higher over the first six months of this year.
The chart shows the bullish trend in cocoa futures that took the price to a $3,324 per ton high in June 2023, the highest price since December 2015. Cocoa made a higher high in early Q3 as the price moves toward a challenge of the December 2015 $3,422 high and technical resistance level. Nearby ICE cocoa futures settled at $3,318 per ton on June 30, not far below the Q2 peak.
Cotton and FCOJ- The least liquid and most volatile softs moved in opposite directions in Q1 and since the end of 2022
Cotton and FCOJ are the least liquid soft commodity futures markets as they attract the lowest volume and open interest. The least liquid markets tend to be the most volatile as bids disappear during selloffs and offers to sell evaporate during rallies.
Cotton futures reached their highest price since 2011 in May 2022 at $1.5802 per pound, where they ran out of upside steam.
The continuous ICE cotton futures chart displays the spike higher that led to a collapse, taking cotton futures to a 70.21 cents per pound low in October 2022. Cotton futures fell 1.85% in Q2 and were 2.54% lower than the end of 2022 closing level on June 30, 2023. Nearby cotton futures settled at 81.25 cents per pound at the end of Q2.
Frozen concentrated orange juice futures rose to a record peak in Q2 2023.
The continuous FCOJ chart shows the rise to $2.9590 per pound in May 2023. Poor Floridian crop yields and conditions in Brazil caused the rally that took orange prices to a record high. FCOJ rose only 0.83% in Q2 but was 31.66% higher over the first half of 2023, leading the soft commodity sector on the upside. Nearby FCOJ was trading at $2.7175 per pound on June 30.
The prospects for softs in Q3 and beyond
Soft commodities were the second-leading sector of the raw materials asset class in Q2, after leading the way higher in Q2. The softs sector was one of two sectors posting a double-digit percentage gain over the first half of this year.
As we move into Q3, cocoa remains in a short-term bullish trend; sugar is consolidating after a correction, coffee is trending lower, while cotton and FCOJ are consolidating and trading in sideways patterns. The weather across the critical growing regions is always the most significant factor for the path of least resistance of prices. However, inflation has caused input prices to rise, putting upward pressure on sector members.
Meanwhile, since Brazil is a leading producer of sugar, coffee, orange, and cotton, the trend in the Brazilian currency is a crucial factor for prices. A rising real causes labor and other domestic input prices to rise, putting upward pressure on prices.
The bullish trend in the Brazilian real versus the U.S. dollar is a positive factor for four of the five soft commodity prices.
After reaching multi-year highs, the odds of corrections, as we witnessed in coffee and cotton futures, are elevated for sugar, cocoa, and FCOJ. Meanwhile, soft commodities have long histories of extreme price moves, so following trends tends to be the optimal approach. Soft commodity prices can rise or fall to levels that defy reasonable, rational, and logical analysis, making trend-following the best trading method for the sector.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
