The Rise of Soft Commodities and the ETFs That Move with The Prices

Soft commodities are tropical agricultural products that trade in the futures market on the Intercontinental Exchange. Brazil is a leading producer and exporter of four of the five sector members, including sugar, Arabica coffee beans, cotton, and oranges that make frozen concentrated orange juice. Cocoa is the only soft commodity that comes primarily from West Africa, where the Ivory Coast and Ghana dominate output, supplying over 60% of the world’s cocoa beans annually.

In 2022, a composite of the five soft commodities edged only 0.31% lower. While FCOJ futures rallied over 40% last year, coffee and cotton futures declined over 25%.

In Q1 2023, soft commodities lead the commodities asset class with an 11.12% gain, led once again by frozen concentrated orange juice futures, with only cotton posting a marginal, under 1% loss for the first three months of 2023.

Cotton edges lower, but it reached a multi-year high in 2022

• ICE cotton futures fell 25.96% in 2022 and edged 0.71% lower in Q1 2023. Cotton was the only soft commodity posting a loss in Q1 2023.
• Nearby cotton futures traded to $1.5802 per pound in May 2022 before turning lower, the highest price since July 2011.
• The iPath Series B Bloomberg Cotton Subindex Total Return ETN (BAL) does an excellent job tracking cotton futures prices.

FCOJ continues to rise to new record highs

• ICE frozen concentrated orange juice futures rose 41.08% in 2022 and continued higher with a 30.57% gain in Q1 2023. FCOJ led the sector on the upside in 2022 and Q1 2023.
• Nearby FCOJ futures traded to new record highs in 2022, Q1 2023, and early Q2 2023, reaching $2.8750 per pound.
• Unfortunately, there are no ETF or ETN products that track FCOJ prices. The only avenue for trading or investment is the ICE futures contracts that offer limited liquidity, leading to high price variance.

 Coffee rose to a multi-year high in 2022

• ICE Arabica coffee futures fell 26.01% in 2022 but posted a 1.91% gain in Q1 2023.
• Nearby coffee futures traded to $2.6045 per pound in February 2022 before turning lower, the highest price since September 2011.
• The iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO) does an excellent job tracking Arabica coffee futures prices.
• In early Q2, coffee probed above the $2 per pound level for the first time in 2023.

Cocoa edges toward a critical technical resistance level

• ICE cocoa futures rose 3.17% in 2022 and posted a 12.81% gain in Q1 2023.
• Nearby cocoa futures traded at over $2900 per ton in March 2023 for the first time since December 2020.
• The iPath Series B Bloomberg Cocoa Subindex Total Return ETN (NIB) does an excellent job tracking cocoa futures prices.
• In early Q2, nearby cocoa futures reached $3,221 per ton, the highest price since June 2016.

 Sugar eclipses the 2016 peak

• ICE world sugar futures #11 rose 6.14% in 2022 and posted an 11.03% gain in Q1 2023.
• Nearby world sugar futures traded at over 22 cents per pound in February and March 2023 for the first time since November 2016.
• The iPath Series B Bloomberg Sugar Subindex Total Return ETN (SGG) does an excellent job tracking world sugar futures prices.
• The Teucrium Sugar Fund (CANE) owns a portfolio of sugar futures contracts that track the sweet commodity’s price.
• In early Q2, nearby sugar futures reached 25.62 cents per pound, the highest price since March 2012.

 Agricultural production costs rise- Softs could be explosive

• Worldwide inflationary pressures have increased soft commodity production costs, pushing prices higher.
• The five soft commodities have reached multi-year or all-time highs over the past months.
• The trend in markets across all asset classes is always your best friend. The trend in soft commodities remains higher in early Q2 2023.
• Bull markets rarely move in straight lines, and volatile commodity markets can suffer significant corrections.
• Buying on price weakness when markets found bottoms has been the optimal approach since the early 2020 lows, and that looks likely to continue into Q2 2023 and beyond.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!