In a January 10, 2024, Barchart article, I wrote:
Soft commodities have been bullish beasts over the past two years. Time will tell if there is enough upside pressure to keep the bullish trends intact in 2024.
The bullish trend was more than intact in Q1 as the softs posted a higher percentage gain than in 2023.
Cocoa leads the way- Weather and crop disease push cocoa to record highs
West Africa has the perfect climate to support cocoa production. Meanwhile, adverse weather conditions and crop diseases have devastated the cocoa crop, causing supply disruptions and the highest price in history.
In 2023, nearby ICE cocoa futures posted a 61.38% gain, and the price exploded 132.75% higher in Q1 2024, closing the first quarter at $9,766 per ton.
In early Q2, on April 11, the price reached $10,771. Cocoa futures were the leader of the soft commodities in Q1 and the best-performing commodity during the first three months of 2024. The bullish price action continued in early Q2.
FCOJ posts an over 20% gain
Frozen concentrated orange juice futures rose to a record high at $4.3195 per pound in October 2023. In 2023, FCOJ futures rose 46.41% and added another 20.20% in Q1 2024, settling at $3.6325 per pound at the end of March.
The chart shows that the volatile FCOJ futures were slightly higher in early Q2, trading on both sides of the Q1 closing level in early April.
Cotton rebounds with a double-digit percentage gain
ICE cotton futures were the third-best performing soft commodity in Q1, posting a 12.81% gain after falling 2.84% in 2023.
The long-term chart highlights that cotton futures settled at 91.38 cents per pound at the end of Q1 and were lower at just over 83 cents on April 12.
Sugar gets sweeter in Q1- Arabica coffee futures edged higher
World free-market sugar number 11 that traded on the Intercontinental Exchange rose 2.69% in 2023 after trading at a twelve-year 28.14 cents per pound high in November. In Q1, the sugar futures rose 9.43%.
The chart shows nearby sugar futures settled Q1 at the 22.52 cents per pound level and were lower and below 21 cents in early Q2.
Meanwhile, Arabica coffee futures rose 12.55% in 2023 and edged only 0.29% higher in Q1 2024.
Coffee futures settled at the $1.8885 per pound level at the end of March 2024 and were significantly higher at over $2.35 in early Q2.
The prospects for Q2
Three of the five soft commodities, cotton, coffee, and sugar, moved to multi-year highs (the highest prices since 2011) in 2022 and 2023. In 2023, OJ futures reached a record high; in Q1 2024, cocoa futures rose to the highest price in history.
Commodities are volatile assets, and soft commodities can be one of the sectors that experience the most significant price variance, as we have seen over the past years. Agricultural products can suffer from significant shortfalls when weather events or crop diseases interfere with production. Meanwhile, inflationary pressures have increased production costs, pushing prices higher over the past years.
Soft commodities were the best-performing sector in 2023 and in Q1 2024. In volatile raw material markets, prices often decline to levels where production slows, inventories decline, and consumers increase purchases, leading to price bottoms, as we witnessed in 2020 when the global pandemic gripped markets across all asset classes.
Conversely, bullish trends and market deficits can take prices to levels that defy rational, reasonable, and logical fundamentals, where production increases, inventories build, and consumption declines. Consumers seek alternatives or go without agricultural products because of the price levels or lack of supplies during parabolic rallies.
The bottom line is that the risk of significant price corrections increases the higher prices rise. Therefore, we should expect wild price volatility to continue in soft commodities in Q2 and beyond. The trend is always your best friend in markets until they bend. It is virtually impossible to pick tops or bottoms in any market, so the risk in the soft commodities sector remains high in early Q2. Investors and traders must approach these markets with extreme care and attention to risk-reward dynamics.
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.
