Soft markets, the exotic choice?
Not so long ago, only few people would have been able to comment on commodities or the commodities markets. But since early 2007 this has changed. The media has been commenting on the increasing prices of metals and oil as a result of the boom of 2003 – 2007. The interest for commodities began to rise with these industrial products, but with the huge leap of some of the agricultural commodities in 2007, the media began to focus on agricultural commodities. Today, everyone is talking about agricultural commodities like they talked about tech companies in the late 90’s.
Agricultural commodities are not a group of homogenous products that are highly correlating in prices. Agricultural commodities are quite diversified and using the term agricultural when looking at prices the last year, is not quite right. Usually agricultural commodities are divided into three groups, grains containing traditional northern hemisphere products like corn, wheat and soybeans, meats containing farm animals and softs or exotics containing products native to more southern parts of the world like coffee, cocoa and sugar. So when we’ve been seeing huge price movements in agricultural products the last couple of years, we’re talking about grains, not meats or softs. In fact these groups didn’t do so well last year. The meats held some ground and most of the softs have not been doing so well either.
But now there seems to be a change. Since the beginning of this year, the softs have been moving towards higher prices, with sugar leading the way. But what is the status of these commodities and what is the prospect for 2008.
Cocoa
Since 2003, cocoa has been trading in a tunnel until 
it broke out of it in the first quarter of 2007. Since then cocoa prices have been moving higher, with an aggressive increase in the price movement the last three months, resulting in the prices now being the highest since 1985. From a fundamental standpoint, all news from the Ivory Coast have affect on the price of cocoa, as around 60% of the world production of coca comes from there. The instability in that country has had quite an effect on the price of cocoa.
Cocoa made a bottom in the last two months of 2000 when it traded less than 700 USD pr. ton. This bottom was quite significant, as it seemed to have signalled a reversal from a stale bear market to a roaring bull. The price of cocoa raced from less than 700 USD in December of 2000 to more than 2,400 USD in January 2003. Following this run, the price of cocoa fell into a trading tunnel of around 1,340 to 1,790 and as such traded around the 50% retracement level of the prior run. The break-out of this tunnel in March 2007 signalled a return of the bulls. The fact that the price of cocoa paused above the tunnel for several months before it continued its climb to higher prices, passing the top of the 2001 – 2003 run, gives a good indication that the price of cocoa has much further to go.
Coffee
Since 1998 the price of coffee has been trading in the lower half of the price movements of the last 25 years. During this time the price of coffee has only been above this mean line from September 1983 to 
January 1987, with a small dip up in December 1988 to January 1989. Coffee then stayed under the mean line until it spiked two times in the late 90’s. First from May and June 1994 to September 1995 and the second and last bull market in coffee, from January 1997 until May, June 1998. Since then the price of coffee has stayed below the mean line bottoming out in November 2001. From that time, coffee started a gradual climb towards higher prices reaching the mean line in March 2005. Coffee prices have since been stuck under this resistance line, being unable to penetrate it until this February when the price of coffee began an aggressive race towards higher prices. When looking at the resistance level and how the price of coffee has been pressing more and towards the line, the aggressiveness of the price movement, when it finally broke through, should not come as a surprise. When looking at the chart we could be looking at coffee reaching similar prices as in 1997, or almost double the price. Considering the value of the futures contract, this could be more than 50,000 USD per contract. We will have to caution those wanting to invest in coffee, that even though we believe coffee to have huge potentials, the price of coffee has a tendency to be quite volatile and therefore should not be traded unless the trader is willing to accept large pull-backs in prices.
Cotton
In October 2001, cotton set a low 
followed by a bull run until October 2003. The price then fell to just under the 50% retracement line in 2004 and traded there in a relatively horizontal way until in June 2007, when it began to move higher. The first months of February have seen higher prices of cotton and there are no indications that this is getting close to the end. As the price of cotton is reaching the high of 2003, we can only expect it to go much further than that. The outlook for cotton is towards higher prices, with cotton prices being about 64% off the high of 1995 and technical indications favouring higher prices. If cotton reaches these prices, we can expect the move to be volatile.
FCOJ
The price of OJ has been, like the one of cotton, quite volatile the last 25 years 
with OJ setting a bottom in May 2004. From that bottom, the price of OJ raced towards the highest price of OJ the last 25 years, reaching that mark in December 2006 and staying there until March 2007 when the price took a dive. It recovered at about halfway down in July 2007 and has been trading there since.
When looking at the Slow Stochastic Indicator, there could be a reversal to the upside for the price of OJ. This reversal could easily reach the high prices of 2006 and 2007
Sugar
While corn prices have been rocketing up due to the increasing use of ethanol use and some supplies and demands issues, 
sugar has not been profiting from it, even though sugar is yielding more energy than corn and being the base of the Brazilian ethanol production, the biggest producer of ethanol in the world. The reason believed to be a surplus in India. Since late December 2007, stories of lower production have on the other hand begun to surface and this has led to some speculation that the availability of sugar could go down. These lower production numbers of sugar are related to bad growing conditions in relation to rain and drought, plus the low incentive to grow sugar cane due to low prices, which actually are believed to be less than the cost of producing sugar. Less production and increased demand for ethanol have now began to show it’s effect on sugar prices, moving them to heights not seen since 2005 – 2006, when sugar prices spiked towards 20 cents a pound. Some analysts maintain that the price of sugar is too high, especially when looking at the surplus and this run therefore not sustainable.
From a technical point of view, the sugar has much higher to go, even though short term indications could result in lower prices for a limited amount of time. The monthly chart in sugar is quite promising; especially after sugar passed a resistance level around 12.60 cents. When looking at the fact that there are more and more funds investing in sugar and sugar is way below highest prices, there could still be a room for relatively large increase in prices. The target, from a long term point of view, can easily be the top of 2006 and from there we are looking at tops close to the beginning of the 1980’s when sugar traded close to the 45 cents mark. The top of the sugar prices was in 1974 when it traded close to 66 cents, so even a half way towards that goal would mean sugar prices at around 33 cents, a considerable move in the prices. Sugar has been trading in the lowest ranges of its prices the last few years, so a modest increase from a long term stand point, could mean a considerable increase in prices.
Sugar prices have been quite volatile and can be difficult to trade. At the time of this writing, one or more individual or entities associated with this website had open positions in sugar.
All of the soft products show a potential for higher prices this year, some having more potential than others. The grains have been setting higher highs with every passing month and when looking at the market sentiments, there is no reason to believe that the other agricultural products could not do the same, or at least get close to their respective highs. This does offer the possibilities of huge profits, but readers should be warned. Commodity trading can be dangerous and in respect to the volatility of these markets, even in a bull run, every investment in them should be done only after a careful consideration. There are also some fundamental considerations that could affect the bullish sentiment in these markets.
