Sugar and FCOJ Take the Bullish BatonThe soft commodities sector of the commodity market can be highly volatile. Historically, sugar, coffee, cotton, cocoa, and frozen concentrated orange juice futures that trade on the Intercontinental Exchange have doubled, tripled, and halved in value over short periods. While clothing and other consumer goods depend on the cotton market, the other sector members are foods.
The soft commodity sector rose in 2021, and Q1 2022
Coffee and cotton rose to multi-year highs in 2022
FCOJ takes off on the upside in April and makes a new multi-year high
Sugar could be next for three reasons
Trading softs from the long side- Buy those dips
Brazil is the world’s leading producer and exporter of three of the soft commodities; sugar, coffee, and oranges. Sugar comes from two sources, sugar beets and sugarcane. Brazil’s tropical climate makes it the leading sugarcane producer. Arabica coffee beans are popular in the US and other areas, while Robusta beans produce espresso coffees. Brazil leads the world in Arabica production. While many people associate orange production with Florida and California, Brazil is the world’s top orange producer. Cocoa, the primary ingredient in chocolate confectionery products, comes mainly from West Africa, as the Ivory Coast and Ghana produce over 60% of the world’s annual supplies.
Soft commodities are agricultural products, so the weather in growing areas typically determines the prices each year. Since the 2020 pandemic, the price action has been anything but ordinary.
The two latest soft commodities to lead the sector on the upside have been sugar and FCOJ futures.
The soft commodity sector rose in 2021, and Q1 2022
In 2021, the composite of the five soft commodities that trade in the futures markets on the Intercontinental Exchange rose 31.57%. In Q1 2022, the softs added to gains, rising 6.58%, with all five members posting gains.
Cotton futures led the softs higher with a 20.51% gain. Cocoa futures moved 5.16% to the upside, with FCOJ posting a 3.86% gain. Sugar rallied 3.23%, and Arabica coffee futures eked out a 0.13% gain.
Meanwhile, coffee and cotton rose to new multi-year highs during the first three months of 2022.
Coffee and cotton rose to multi-year highs in 2022
In June 2020, coffee futures made a higher low under the $1 per pound level before taking off on the upside.
The weekly chart shows the bullish trend of higher lows and higher highs that took coffee futures to $2.6045 per pound in early February 2022. Coffee futures rose to the highest price since 2011.
Cotton futures also rose to the highest level since 2011, peaking at the $1.4614 per pound level in April 2022.
Coffee futures were over the $2.20 level, with cotton above $1.40 on April 14.
FCOJ takes off on the upside in April and makes a new multi-year high
Frozen concentrated orange juice futures are the least liquid of the five soft commodities, based on daily volume and open interest metrics. While the FCOJ futures arena rose to a new multi-year high in Q1 2022, the bullish price action continued in April with higher highs.
The chart shows that nearby FCOJ futures rose to $1.8660 per pound last week, the highest level since March 2017. The all-time high in the orange juice market came in 2016 at $2.35 per pound.
Brazil is the leading producer and exporter of oranges and Arabica coffee beans. The South American country also is the leader in free-market sugarcane production and exports.
Sugar could be next for three reasons
Sugar futures rose to 20.69 cents per pound in November 2021, the highest price since February 2017.
The weekly chart shows that sugar futures were above the 20 cents per pound level last week. Sugar is approaching the first technical resistance level at the November 2021 20.69 cents high. Above there, the next target is at the October 2016 23.90 high, which is a technical gateway to the 2011 36.08 cents per pound peak.
Three factors support sugar prices in April 2022:
Rising inflation is lifting all commodity prices, and the trend is always your best friend in markets across all asset classes.
Rising crude oil and natural gas prices support sugar. Crude oil is over the $100 per barrel level, and natural gas stopped just short of $7 per MMBtu last week. Multi-year highs in the energy market support sugar as it is the primary input in Brazilian ethanol production. As more sugarcane goes into ethanol production, less is available for exports.
Sugarcane production costs are increasing as they are labor-intensive. The rising Brazilian real makes sugar more expensive to produce.
The chart illustrates the technical breakout to the upside in the Brazilian currency against the US dollar. A higher real increases the cost of production, putting upside pressure on sugar’s price.
Trading softs from the long side- Buy those dips
Stocks and bonds have been shaky in 2022, and cryptocurrencies have not yet of the slump that took prices lower since the November 2021 highs. Commodities have been the place to be for investors and traders over the first four months of 2022. The latest inflation report will likely keep the bullish party in raw material markets going.
I remain bullish on soft commodities as they are highly volatile and can offer explosive returns. Sugar is my top choice as of April 15, as the sweet commodity loosed poised to eclipse the 2021 high on its way to higher ground. Meanwhile, I favor all soft commodities in the current environment. The optimal approach to the sector has been buying on price weakness, and I expect that to continue. Bull markets rarely move in straight lines, and corrections can be the best route to optimizing returns over the coming weeks and months.
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