From Cocoa to Coffee and Sugar, Soft Commodities Stage Simultaneous Rally

Date: Monday, August 17, 2020
Source: The Wall Street Journal

Coronavirus outbreaks in key soft-commodity-producing nations spark worries about supply constraints—and buoy prices

The raw ingredients for goods including chocolate and clothes have rebounded after their pandemic-fueled declines, lifted by supply constraints and investors’ bets that a recovering economy will boost consumer demand.

Cocoa, coffee and other soft commodities trading on the Intercontinental Exchange have bounced back from their lows earlier this year and now number among the world’s best-performing major assets. In the past month alone, cocoa futures have risen 15% to $2,448 a metric ton and coffee futures have climbed 14% to $1.11 a pound.

Cotton and sugar futures have also surged in recent months and are up 11% and 20%, respectively, since May 1.

That marks a reversal after many soft commodities recorded sizable drops when businesses around the world shut down and regional lockdowns took effect. In March, cocoa futures shed 17%, cotton fell 18% and sugar lost 27%. Coffee had a brief surge in late March but tumbled 15% between March 1 and the end of May.

One key factor behind the unusual simultaneous climb: continuing problems with the coronavirus in key soft-commodity-producing nations.

“The big picture is countries like Vietnam and Brazil have major virus issues going on and the fear is that it’s obviously going to slow the supply coming online as the infections accelerate,” said Joshua Graves, senior market strategist with RJO Futures.

Large suppliers including Brazil and India are among the areas hardest hit by the virus. Brazil is the world’s top producer of coffee and sugar, producing 59 million bags of coffee and 647 million metric tons of crushed sugar cane in 2019, according to data from the U.S. Agriculture Department. India produces roughly 350 million tons of sugar cane and 29.3 million 480-pound bales of cotton, the USDA said.

Brazilian authorities warn that even though the country’s largest port, in Santos, São Paulo, has handled a record tonnage of cargo this year, the 11% gain over last year came from higher soybean demand from China and they expect the pandemic to eventually hit cargo volumes.

“The figures revealed by the Port of Santos do not yet reflect the world-wide health crisis, but the trend is for this scenario to change and for the coming months to show the effects of Covid-19 on some cargo,” said Fernando Biral, president of the Santos Port Authority, in June.

Situations like that have many investors anticipating that supply constraints will run up against pent-up demand from nations further into their recoveries. That could drive prices for soft-commodity futures even higher.

“Coffee prices are going through the roof because of the strains on its supply chain placed by the pandemic,” said Barani Krishnan, commodities analyst with “Juxtapose that with the anecdotally higher consumption of coffee by those stuck at home, and you have a potent recipe for demand, despite the drop in sales at Starbucks and Dunkin’.”

The gradual weakening of the U.S. dollar is another factor lifting soft commodities. A weaker dollar makes it more affordable for importing nations to buy commodities priced in the U.S. currency. The dollar just posted its worst month in nearly a decade on the ICE Dollar Index, pushing traders to cut back on bets that soft-commodity prices will fall.

Speculative investors including hedge funds cut their so-called short positions in a variety of soft commodities in the week ended Aug. 4, according to data from the Commodity Futures Trading Commission. Short positions in sugar were down by nearly 10,000 contracts, cocoa shorts were cut by more than 7,000 contracts and coffee shorts fell by more than 19,000 contracts.

It was the second consecutive week that the CFTC reported a big unwinding of short bets by major investors—who are now net long in all soft commodities. That indicates investors are anticipating that prices for these commodities will rise going forward.

“With the weakness of the dollar, that caught them short,” said Jonathan Parkman, joint head of agriculture for London-based brokerage Marex Spectron.


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