Soft Commodity Quarterly Report: Cocoa Outperforms Declining Coffee, Cotton & Sugar

October 04, 2012

Higher production of sugar and cotton keep prices low, slack demand dents coffee, while cocoa breaks out of trading range.


Soft commodity markets saw mixed results for the third quarter of 2012 as money managers reduced their sugar positions, but added to cocoa and cotton. Other than cocoa, the sector continues to underperform, while other commodity sectors received a boost in the third quarter from the Fed’s QE3 announcement.

For sector context, the iPath Pure Beta Softs ETN (NYSE Arca: GRWN), which tracks coffee, cotton and sugar, has fallen by 2 percent during the last three months and 17 percent year-to-date.

Here’s a look at all four of the major soft markets and how they have been performing.


Coffee prices, as measured by the ICE futures contract (KC), finished the third quarter at $1.73 a pound, down 4 cents, or just under 4 percent on the quarter, but only after having traversed a range of 36 cents a pound (and still down 22 percent YTD).

The market made a short-term bottom in late June at $1.57 a pound after a long decline that began in May 2011 when prices were slightly more than $3.00 a pound.

In late June and into early July, prices rallied on the absence of producer selling and concerns of too much rain in Brazil during the critical harvest season. Excessive rain can damage quality. Both events triggered a short covering rally by money managers.

Long-term moving averages crossed in late June and early July, triggering buy signals, only to indecisively cross back again in September.

After rallying to a high of $1.93 a pound in early July, prices fell back on renewed producer selling. Cash premiums also fell, as a lack of buying from manufacturers made the ICE futures contract the best buyer of physicals and has resulted in an increase in certified stocks.

Fund manager are currently net short a minor 6,000 lots, about unchanged on the quarter. The marketing of next year’s crop from Central America will be key to the future direction of coffee prices. The Central American harvest begins in earnest in December and extends through March of next year.


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