Soft Commodities Weekly Component Report PDF-06.09.2021

Soft Commodities Weekly Component Report Spreadsheet-06.09.2021

Cocoa continued to edge lower over the past week, coffee corrected, but the other soft commodities posted gains. FCOJ and cotton futures led the way on the upside, sugar moved only marginally higher. July sugar futures rose only 0.28% since June 2, with the price settling at 17.73 cents. The price had mostly made higher lows and higher highs over the past months. The latest high came on February 23 when the expired March sugar reached 18.94 cents, the highest price since March 2017. The July contract reached a high of 17.05 cents on April 22 and 23, creating a double top. It then blew through that level and reached a high at 18.25 on May 12.

After reaching a continuous contract low of 9.05 cents in April 2020, the price nearly doubled at the most recent peak.  Technical resistance on July futures stands at 18.25 cents, the recent high. The continuous contract 18.94 high is the upside target for the sweet commodity. Support sits at 16.46 cents on the July futures, the April 29, 2021 low. The price action in the energy and agricultural products had supported gains in the sugar futures market over the past weeks and months. The mid-March correction in crude oil likely prompted selling in the sugar futures arena. 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.

Sugar prices are also highly sensitive to the exchange rate between the US dollar and the Brazilian real. The value of the June Brazilian real against the US dollar was at the $0.187850 level against the US dollar on Wednesday, up 0.03% since the previous report. The June real futures traded to a low of $0.17165 on March 9 but has recovered and made higher highs. Brazil leads in the production of sugar, coffee, and FCOJ, and two of the three posted gains since June 2. 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 were trending higher above neutral readings as of June 2. The metrics on the monthly chart were above neutral readings. The quarterly chart is above a neutral condition and rising. Sugar probed below the 15.00 cents area in late March and early April on the July futures contract and then rebounded and is now sitting just below the 18 cents level. The low at 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 recent action from late March in crude oil, gasoline, and most significantly ethanol prices are supporting sugar prices.

Open interest in sugar futures moved 0.67% lower since the previous report. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. 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 remain long and bullish on sugar. 

July coffee futures fell 2.45% higher since June 2. July futures were trading at the $1.5720 per pound level. The short-term technical level on the downside is at the $1.4745 level on the July futures contract, the May 24 low. Below there, support is at around $1.2020 and $1.0215 on the continuous futures contract. Technical resistance is now at $1.6675, the recent high and $1.76, the November 2016 high. Coffee futures put in a bearish reversal on the daily chart on April 29 and drifted lower before exploding higher on May 5 and making a new high on May 6. The November 2016 $1.7600 high on the continuous futures contract is an upside target for the coffee futures market.  

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 is now lower than the May closing price. Our stop on the long position in JO is at $27.99. JO was trading at $44.79 on Wednesday. I would move the stop higher to protect profits on the ETN. Open interest in the coffee futures market rose by 1.87% over the past week. I continue to hold a core long position in the coffee market.  

The upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength are above neutral readings. On the monthly chart, the price action was near overbought readings and rising. The quarterly picture was rising and above neutral 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 profit objectives. The price of cocoa futures continued to decline over the past week.

On Wednesday, July cocoa futures were at the $2,348 per ton level, 3.22% lower since the previous report. Open interest was 0.34% higher since June 1. Relative strength and price momentum were at oversold readings as of June 2. The expired December 2020 futures rose to $3,054 per ton, which was a sign of tight supplies, rising demand, or both. Hershey’s buying in the futures market distorted prices and sent them to the highest price since August 2016. 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 $28.93 on Wednesday, June 9. The levels to watch on the upside are at $2,552 and $2,754 per ton. On the downside, technical support levels are at $2,317, $2,283, and then at $2,237 per ton on the continuous contract.

Below there, the level to watch is at $2,137 and $2,000 per ton. The longer-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. 

July cotton futures were 3.40% higher since June 2. The USDA will release its June WASDE report tomorrow, providing guidance on supply and demand fundamentals in the fluffy fiber. July cotton was trading at 86.62 cents per pound on June 9. On the downside, support is at 81.50, 77.12, and then at 48.35 cents per pound.

Resistance stands at 91.66, 92.95, and 96.50 cents. Open interest in the cotton futures market fell 0.64% since May 18. Daily price momentum and relative strength metrics turned higher from oversold territory and were above neutral readings and rising on Wednesday. Cotton reached a bottom at the 77.12 cents level on the continuous futures contract. The most recent move to the upside took the July futures to 91.66 cents on April 27 before making lower highs and lower lows. Cotton has been back in bullish mode since mid-May.

I had been optimistic about the prospects for the price of cotton since the 50 cents per pound level, but as I wrote, as the price rose above the 90 cents per pound level, the risk increased with the price. 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. 

July FCOJ took off on the upside over the past weeks. On Wednesday, the price of the active month futures contract was trading around $1.2865 per pound, up 7.07% since June 2. Short-term support is at $1.1350 level, the May 20 low. Technical resistance moved higher to $1.2950 per pound, the high from late November on the weekly chart. Open interest fell by 3.63% since June 1. Price momentum and relative strength indicators were at overbought conditions on June 9.

When FCOJ fell, I wrote:

“I have begun nibbling at long positions below the $1.10 level with a stop under $1.05.”

I am protecting long positions and increasing my stop levels as the price rallies while selling on a scale-up basis.

Soft commodity prices have been trending mostly higher during the second quarter. This volatile sector of the commodities asset class always has the potential for wild price volatility as they can double, triple, or halve in short periods. I remain bullish on all five of the soft commodities, using trailing stops as prices move higher.