Soft Commodities- The Leader In Q3

The soft commodities sector contains five agricultural commodities that tend to grow in tropical climates. The soft commodities futures trade on the Intercontinental Exchange. Brazil is the leading producer and exporter of three sector members; sugarcoffee, and oranges. The vast majority of the world’s cocoa supplies come from West Africa, with the Ivory Coast and Ghana producing around 65% of the annual production. The world’s leading cotton producers are China, India, the US, Pakistan, and Brazil. 

As agricultural commodities, the softs sector is highly sensitive to the weather conditions in production locales. The geopolitical landscape can make them highly volatile as logistical issues aside from the weather can impact prices. Soft commodities have a long history of explosive and implosive price action. In my Q2 Barchart report on the soft commodities sector, I wrote, “The rallies may just be getting underway in the softs if inflationary pressures continue to rise.” The sector gained 12% in Q2, turning a loss in the first quarter into a profit over the first six months of 2021. In Q3, soft commodities took the leadership baton as the asset class’s best-performing sector. 

Double-digit gains across the board in Q3

The composite of sugar, coffee, cocoa, cotton, and FCOJ futures prices rose 17.43% in Q3, making the softs the only sector to post a double-digit percentage gain from July through September. All five soft commodities rose by over 10% over the three months:

  • Cotton led the way higher with a 25.91% gain in Q3.
  • Coffee was the second-best performing soft commodity in Q3 with a 21.74% gain.
  • Sugar futures moved 15.37% higher in Q3.
  • Cocoa moved 12.37% higher in Q3.
  • FCOJ rallied 11.77% in Q3. 

Soft commodities not only led the asset class higher, but four of the five commodities moved to price levels not seen in years. 

Multi-year highs in cotton, coffee, sugar, and FCOJ

Cotton was the leading soft commodity, and the price action took the fluffy fiber futures to the highest price level in a decade in Q3. 

The chart shows nearby cotton futures traded to a high of $1.0780 per pound in Q3 and settled at the $1.0580 level, the highest price in a decade since June 2011. In early October, cotton futures make an even higher high at $1.1648. 

Nearby ICE coffee futures rose to the highest price since 2014 in late July when they reached $2.1520 per pound. Coffee futures had not traded above $2 from October 2014 through June 2021. A frost in Brazil and other factors combined to push coffee beans to multi-year highs. At the end of last week, the price remained above the $2 level.  

The chart shows that nearby ICE sugar futures moved over the 20 cents per pound level for the first time since February 2017 in August during Q3 2021. 

ICE FCOJ futures moved to highs of $1.48 per pound in September 2021, the highest price since October 2018. 

While ICE cocoa futures posted a 12.37% gain in Q3, they only made a new high for 2021 in the early days of Q4.  

A healthy gain over the first nine months of 2021

Soft commodities were 25.48% higher since the end of December 2020 on September 30. Coffee led the way on the upside, with cotton and sugar both over 30% higher over the three quarters:

  • Coffee futures have led the way over the first three quarters of 2021 with a 51.27% gain.
  • Cotton futures were 35.43% over the first nine months of 2021.
  • Sugar futures moved 31.31% higher from the end of 2020 through September 30, 2021. 
  • FCOJ was 7.51% higher over the first three quarters of 2021. 
  • Cocoa was 1.88% above the December 31, 2020 closing price as of September 30. 

The 25.48% gain over the first three quarters put soft commodities in third place behind energy and base metals

Spotlight on Brazil

Since Brazil is the primary producer of three soft commodities, the currency relationship between the Brazilian real and US dollar tends to impact prices. When the real moves higher against the dollar, production costs rise, pushing prices higher. When the real falls, it tends to weigh on prices as producers can sell at lower levels. 

The chart illustrates the decline from $0.20123 on June 30 to $0.18367 on September 30, 2021, an 8.73% drop in the real’s value against the dollar. While the lower real has historically weighed on coffee, sugar, and FCOJ prices, other factors pushed them higher in Q3. A frost impacted supplies and bottlenecks caused by the pandemic have been bullish for the three soft commodities. Brazil has suffered the third most reported COVID-19 cases behind the US and India and is second in fatalities behind the US. The virus has caused supply chain and supply issues that fostered higher prices. 

Expect lots of volatility

As we move into the final three months of 2021, expect lots of price variance in the soft commodities sector. The leading sector during one period often becomes a laggard in subsequent periods. 

Meanwhile, if the period from 2008-2011 is a model because of liquidity and stimulus causing inflationary pressures, the rallies may be far from over. Soft commodities hit peaks in 2011. Bull markets rarely move in straight lines, so buying on corrections could be the optimal approach to the cotton, coffee, sugar, cocoa, and FCOJ futures markets over the coming months.