Soft Commodity Quarterly Report: Cocoa, Coffee, Cotton & Sugar All Decline

July 20, 2012

However weather may play a bigger role in boosting prices in the current quarter.

Soft commodity markets had mixed results for the second quarter of 2012, substantially under-performing many of the grain markets.

The ipath Pure Beta Softs ETN (GRWN) which tracks coffee, cotton and sugar, has declined by 19 percent during the last three months and 21 percent year to date.

By comparison, the broader-based ipath Pure Beta Agricultural ETN (DIRT), which tracks nine ag commodities and is more heavily weighted to grains, rose 20 percent over the last three months and 22 percent year to date.

Let’s take a look at four of the major, soft commodity markets to see what has been dragging them down.

Coffee

Coffee prices, as measured by the benchmark ICE futures contract, currently stand at $1.82 a pound, down 9 cents or 5 percent from the beginning of the second quarter of 2012 (but down18 perent YTD).

The market continued a long-term decline during April and May that began more than a year ago in May 2011, when prices stood at just over $3a pound. High prices in 2011 resulted in decreased consumer demand and a switch by manufactures from the higher-quality coffees represented by the ICE Futures contract to cheaper, lower-quality coffees, primarily from Vietnam.

The long-term bearish trend made a quarterly bottom in mid-June at $1.48 a pound. A short-covering rally, propelled in part by concerns of potentially damaging cold weather in Brazil's coffee growing areas, drove prices back to today’s levels.

Long-term moving averages also were crossed in late June, triggering technical-buy signals. Money managers, who had been holding short positions of 13,000-15,000 lots, have covered in most of their positions and are currently net short a modest 6,000 lots. Traders are cautious of short positions during the Brazilian frost season, when freezing temperatures can dramatically impact next year’s crop.. Brazil is the world's largest coffee producer and its frost season in the southern hemisphere traditionally ends by late August.

Cotton

Exhaustion is the best word to describe the cotton market. Prices as measured by the ICE Futures #2 contract currently stand at 71 cents a pound, down 23 percent during the second quarter (down 26 percent YTD). This is in stark contrast to the lofty highs cotton prices rose to back in July of 2010, when prices began a bull move from 78 cents a pound culminating in a peak of $2.27 a pound eight months later. The cotton market had not seen prices that high since the Civil War.

Since March 2011, prices have been in a long-term slump due to increasing supply, competition from synthetic fibers and reduced demand. The market has now given back all its gains, and then some.

Money managersare basically square and so far have shown little renewed interest in the cotton market. However, traders are closely watching potential drought conditions in the south and southwest of U.S. Americais one of the largest producers of cotton along with China and India, and continued dry conditions may considerably reduce domestic production.

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