Soft Commodities – Q2 Overview – Q3 Outlook 2021

Soft Commodities Weekly Component Report PDF-09.22.2021

Soft Commodities Weekly Component Report Spreadsheet-09.22.2021

Soft commodities posted across-the-board losses over the past week, with FCOJ leading the way on the downside. Cotton, coffee, sugar, and cocoa prices all moved lower after recent gains.

October sugar futures rolled to March and fell 1.28% since September 15. The October futures settled at 20.07 cents per pound on September 22. The price had mostly made higher lows and higher highs over the past months, and the trend was bending lower over the past week. The high in 2021 came on August 17 at 20.94 cents, the highest price since February 2017. Coffee, sugar, and FCOJ all moved to multi-year highs over in July and August. Frost conditions in Brazil over the past months and the pandemic are impacting supplies, which is not bearish for the sweet commodity’s price. The three soft commodities retreated over the past week. The Brazilian real edged lower since September 15.

After reaching a continuous contract low of 9.05 cents in April 2020, the price over doubled at the most recent peak.  Technical resistance on March futures is at 20.94 cents, the August 17 high. Technical support is at 19.31 cents, the September 13 low. A significant upside target on the monthly chart stands at the October 2016 peak of 23.90 cents per pound. In 2011, sugar reached a high of 36.08 cents. Sugar could not close above 15.50 on March 31, ending the streak of quarterly gains at three. However, the price moved aggressively higher throughout April and into early May and rose in Q2. In June, sugar posted a marginal gain, and in July, the price moved higher. In August, sugar futures rose to a new high for 2021. Over the past weeks, the price had been probing over the 20 cents per pound level, a multi-year high.

Sugar prices can be sensitive to the exchange rate between the US dollar and the Brazilian real. The value of the November Brazilian real against the US dollar was at the $0.188100 level against the US dollar on Wednesday, down 1.03% since the previous report. The real futures traded to a low of $0.17030 on March 29 but had recovered and made higher lows and highs but failed above the $0.20 level in late July and early August. The real has been crawling back towards that level. Brazil leads in the production of sugar, coffee, and FCOJ. The soft commodity futures could follow the Brazilian currency if it makes a substantial move. The three retreated with the real over the past week.

Meanwhile, Brazil remains a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy. Price momentum and relative strength on the daily sugar chart were just above neutral readings on September 22. The metrics on the monthly chart were still rising. The quarterly chart is well above a neutral condition and is also rising. The low at the April 2020 continuous contract low of 9.05 sugar fell to the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011.

At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world.

Meanwhile, since Brazil is a leading commodity producer, rising raw material prices could push the real’s value higher, leading to gains in the world sugar futures market. The action from late March in crude oil, gasoline, and most significantly, ethanol prices, are supporting sugar prices. Sugar faced weakness in the oil market as the price of the energy commodity slipped below the $65 level for the first time since May on August 18 and moved to a low of $61.74 per barrel on the October NYMEX contract over the past week. However, the recovery to over the $70 level could eventually lift sugar to higher highs.

Open interest in sugar futures moved 7.01% lower since the previous report during the October-March roll. Open interest had been gently rising as the sugar price rose over the past year, which is a technical validation of the bullish price action. Sugar can be a highly volatile soft commodity. I took some small profits above the 20 cents level; did some buying below 19.50 cents and continue to hold a long position in sugar. My long position is around 80% of the level at the high.

December coffee futures fell 1.33% since September 15 after reaching the highest price since October 2014 on July 26. Nearby coffee futures rose to a high of $2.1520 on the back of frost conditions in Brazil that threaten the Arabica crop. Time will tell if the price action on July 26 was a blow-off top in the coffee futures market or a new goal for futures rallies.

December futures were trading at the $1.84850 per pound level on September 22. The short-term technical level on the downside is at the $1.7450 level on the December futures contract, the August 2 low. Below there, support is at around $1.7160 and $1.4705 on the continuous futures contract. Technical resistance is at $2.0155, the August 31 high, the $2.1520 high, and at $2.2550 the October 2014 peak.

After putting in a bullish reversal on the monthly chart in November 2020, coffee’s price posted gains in December but was lower in January. Coffee soared higher in February. In March, it gave back February’s gains. In April, the price exploded to a new and higher high. In May, the price moved even higher. After a new high in early June, the price closed last month lower than the May closing price. In July, coffee exploded higher. In August, coffee’s price moved higher. In September, the price corrected lower and has been consolidating. JO was trading at $51.02 on Wednesday. I took profits on 40% of my JO position. I would move the stop higher or take some profits on the ETN. Open interest in the coffee futures market fell by 0.23% over the past week. From a trend-following perspective, I remain long coffee.

Daily price momentum and relative strength were below neutral readings as of September 22. On the monthly chart, the price action was at overbought readings and attempting to cross lower. The quarterly picture was rising and near overbought territory. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined and specific profit objectives.

The price of cocoa futures drifted a bit lower over the past week. On Wednesday, December cocoa futures were at the $2,652 per ton level, 0.41% lower since the previous report. Open interest was 2.96% higher since September 14. Relative strength and price momentum were at neutral readings as of September 22. The cocoa market tends to display lots of volatility during roll periods because of deliveries. Avoiding the West African $400 per ton surcharge has caused some consumers to turn to the futures market for supply requirements. The trend is likely to continue to add volatility to the futures market so long as the Ivory Coast and Ghana impose the premium for their beans. The two countries supply over 60% of the world’s cocoa annually. We are long the NIB ETN product. NIB closed at $31.37 on Wednesday, September 22. The levels to watch on the upside are at $2,717 and $2,754 per ton.

On the downside, technical support levels are at $2,517, $2,232, and $2,137 per ton on the continuous contract. The long-term target on the upside is at $3,826 per ton, the all-time peak from 2011. I continue to favor the upside in the cocoa market. We are likely to see continued volatility in the cocoa futures arena in 2021. Cocoa prices can become very volatile as the weather and political conditions in West Africa are the most significant factor for the primary ingredient in chocolate confectionery products. The soft commodity always has the potential for wide price variance because of the weather and conditions in West Africa.

December cotton futures were 2.68% lower since September 15. December cotton was trading at 90.87 cents per pound on September 22 after reaching a high at 96.71 cents on August 17, the highest price since 2014. Cotton took the elevator lower on September 20 reaching a low of 88.95 before recovering over the 90 cents level.

On the downside, support is at 88.95, 86.94, 77.12, and then at 48.35 cents per pound. Resistance stands at 96.71 and 97.35 cents, the March 2014 high. Cotton rose to a new multi-year high in August. Open interest in the cotton futures market moved 3.88% lower since September 14. Daily price momentum and relative strength metrics were below neutral readings and crossing higher after falling to oversold territory on Wednesday. Cotton reached a bottom at the 77.12 cents level on the continuous futures contract in March. The trading pattern remains bullish as cotton continues to make higher lows and higher highs.

I had been optimistic about the prospects for the price of cotton since the 50 cents per pound level. The last time the price rose above the 90 cents per pound level, the risk increased with the price causing a selloff. This time, the price rose to a new high and above the June 2018 96.50 high, which could be a gateway to $1 per pound and higher.

I would continue to use tight stops on any long positions and a reward-risk ratio of at least 2:1. A softening in the tensions between the US and China under the new administration could support the price of the fiber futures. Cotton suffered selling pressure in 2008 that pushed the price to below 40 cents per pound. A decline in production and stimulative policies by central banks took cotton from the bottom end of its pricing cycle twelve years ago to an all-time high of $2.27 per pound in 2011. Cotton can be a highly volatile soft commodity that takes the stairs higher and elevator to the downside during corrections. Cotton can be seasonal as it tends to rally in the spring. The price action on September 20 was a sign of what to expect in cotton; slow and steady rallies and sudden scary selloffs.

November FCOJ futures were trading at $1.4005 per pound, down 2.91% since September 15. Short-term support is at the $1.3480 level, the August 16 low. Technical resistance is at $1.49950 per pound, the August 24 peak. Open interest fell by 1.06% since September 14. Price momentum and relative strength indicators were below neutral readings on Wednesday. FCOJ futures likely experienced the same Brazilian weather issues as coffee and sugar. The three soft commodities have corrected from the highs but remain in mostly bullish trends.

All five soft commodities moved lower over the past week. The overall medium-term tone of the sector remains bullish.