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Soft Commodities Weekly Component Report PDF-01.12.2022

Soft Commodities Weekly Component Report Spreadsheet-01.12.2022

Sugar was unchanged over the past week, while coffee, cocoa, cotton, and FCOJ futures prices moved higher.

March sugar futures were unchanged since January 5. The March futures settled at 18.34 cents per pound on January 12. The high in March futures 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 the summer months. Frost conditions in Brazil and the pandemic caused supply concerns, which pushed the sweet commodity’s price higher. Rising energy prices support sugar as it is the primary input in Brazilian ethanol production. However, rising oil and gasoline prices have not supported sugar in early 2022. Even though the Brazilian real edged higher over the past week, sugar continued to decline.

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 19.90 cents, the December 8 high. Technical support is now at 17.60 cents, the January 10 low, which has all the hallmarks of a bottom in the sugar futures market. 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 prices can be sensitive to the exchange rate between the US dollar and the Brazilian real. The value of the March Brazilian real against the US dollar edged higher to the $0.178850 level against the US dollar on Wednesday, up 2.88% since the previous report. 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.

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 crossed higher from an oversold condition and were rising on January 12. The metrics on the monthly chart turned lower above neutral territory. The quarterly chart is well above a neutral condition. 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. As central bank and government stimulus have caused 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.

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 supported sugar prices. In late November and early December, the most substantial decline in crude oil and oil products since April 2020 weighed on sugar futures. The recent rallies in energy prices have not pushed sugar futures higher. Meanwhile, February ethanol at $2.1100 per gallon is not a bearish factor for the sweet commodity. Sugar could follow crude oil, gasoline, and ethanol prices over the coming weeks and months, but that has not been the case over the past weeks.

Open interest in sugar futures moved 1.04% higher since the previous report. Open interest had been gently rising as the sugar price rose over the past year, which was 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 19.00 and 18.00 cents, and continue to hold a long position in sugar. My long position remains around 85% of the level at the high.

March coffee futures rose to a high of $2.5235 per pound on the continuous contract, the highest price since 2011 on December 7.  March futures were trading at the $2.4085 per pound level on January 12, up 3.93% since the previous report. The short-term technical level on the downside is at the $2.2055 level on the March futures contract, the January 3 low. Below there, support is at around $1.9130 and $1.7160 on the continuous futures contract. Technical resistance is at the $2.5235 the December 7 high and at over $3 per pound, the 2011 peak.

JO was trading at $65.40 on Wednesday. I took profits on 60% of my JO position, selling another 10% on December 7 as coffee made higher highs. I would move the stop higher or take some profits on the ETN. Open interest in the coffee futures market rose by 1.25% over the past week. From a trend-following perspective, I remain long coffee. I would look to buy on a dip towards the $2-$2.20 level.

Daily price momentum and relative strength were above neutral readings and rising as of January 12. On the monthly chart, the price action was at overbought readings. The quarterly picture was rising in 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 rallied over the past week. On Wednesday, March cocoa futures were at the $2,559 per ton level, 4.15% higher since the previous report. Open interest was virtually unchanged since January 4. Relative strength and price momentum were above neutral readings and rising as of January 12. 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 $29.41 on Wednesday, January 12. The levels to watch on the upside are at $2,665, $2,792, and $3,054 per ton.

On the downside, technical support levels are at $2,408 and $2,232 per ton on the continuous contract. The long-term target on the upside is at $3,826 per ton, the 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. Cocoa’s dip was a buying opportunity. I will use wide scales to add to my long position.

March cotton futures moved 1.17% higher since January 5. March cotton was trading at $1.1764 per pound on January 12 after reaching a high at $1.18990 on January 12. The continuous contract rose to $1.2167 in early November, the highest price since 2011. Cotton took the elevator lower on September 20, reaching a low of 88.95 before taking off like a rocket.

On the downside, support for March futures is at $1.1200, $1.0427, and $1.0350 cents per pound. Resistance stands at $1.2167, the November 2 high on the continuous contract. Open interest in the cotton futures market rose 0.43% since January 4. Daily price momentum and relative strength metrics were above neutral readings and near an overbought condition on Wednesday. Cotton reached a bottom at the 77.12 cents level on the continuous futures contract in March. Cotton is consolidating after the recent correction from the peak, but the price remains at the highest level since 2011. I had been optimistic about the prospects for the price of cotton since the 50 cents per pound level.

I would continue to use tight stops on any long positions and a reward-risk ratio of at least 2:1. We are long two units of the BAL ETN at $39.91 and $35.88 per share. At $66.74 on December 1, the risk positions have profits of 67.2% and 86%. I have taken profits on 80% of the BAL position and suggest selling some or setting a stop that guarantees a profit.

The USDA told the cotton market:

“U.S. 2021/22 cotton ending stocks are projected lower this month with lower production and a slight increase in domestic consumption more than offsetting lower exports. Production is 660,000 bales lower at 17.6 million bales—largely due to revised Texas yields—and U.S. mill use is 50,000 bales higher, at 2.55 million bales, based on faster than expected gains through November. Exports are reduced with a lower U.S. crop, continuing logistical issues in the United States and elsewhere, and a decline in projected world trade. Exports are reduced 500,000 bales to 15.0 million, and 2021/22 ending stocks are 200,000 bales lower relative to last month, at 3.2 million bales or 18 percent of use. The projected upland season-average price received by U.S. farmers is unchanged this month, at 90 cents per pound. Changes in the global 2021/22 balance sheet are relatively small this month, led by a 608,000-bale reduction in world production. Projected world production is reduced as lower U.S. production and a 500,000-bale decline in India’s crop more than offsets increases for China, Australia, and Pakistan. The 2021/22 world cotton trade forecast is 385,000 bales lower this month. A 500,000-bale decline in China’s expected imports more than offsets a 200,000-bale increase for Pakistan, and smaller changes elsewhere. Exports are projected lower for the United States and Burkina Faso, but higher for Australia and smaller Franc Zone exporters. The 2021/22 global consumption forecast is virtually unchanged as a 500,000-bale decline in China’s cotton use is offset by gains for India, Mexico, and Pakistan. Global ending stocks for 2021/22 are down 726,000 bales this month, at 85.0 million bales, 3.4 million bales lower than in 2020/21.”

Source: January USDA WASDE report

US ending stocks and global cotton inventories fell in the latest WASDE report, which is fundamentally bullish for the fluffy fiber’s price.

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. I will not be buying any cotton until the market settles.

March FCOJ futures were trading at $1.4490 per pound, up 1.44% since January 5. Short-term support is at the $1.39150 level, the January 6 low on the March contract. Technical resistance is at $1.47550 per pound, the August 26 peak. Open interest rose by 0.77% since January 4. Price momentum and relative strength indicators were at overbought readings on Wednesday. FCOJ futures likely experienced the same Brazilian weather issues as coffee and sugar. I was a scale-down buyer of FCOJ futures during the decline that began in late August and reached a low in early November. I did some selling during the recent rally but remain long around 60% of the original position.

Sugar was looking for a short-term bottom and it needed to hold the 17 cents per pound level to keep the bullish pattern intact. Coffee has been consolidating as Brazilian supply issues look set to push the price to challenge the high. Cocoa was back in bullish form over the past week, and cotton and FCOJ are not far below the recent highs. The tone of the soft commodities sector remains bullish.

A Final Note

The Fed minutes have weighed on stocks, bonds, and interest-sensitive commodities over the past week as precious metals declined. Meanwhile, inflation remains a clear and present danger that should keep the bullish relay race intact over the coming weeks and months. The December CPI data told us that the Fed is far behind the inflationary curve. The Fed’s target is an average of 2%. Core inflation rose by 5.5% in 2021.

I remain bullish on commodity prices, and that includes precious metals. I would not be shocked to see a sudden rally in the precious metals, which is long overdue given the underlying bullish inflationary trend.

I plan to increase the price of the report in the coming months. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.

 

Until next week,

Andy Hecht

 

 

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.