Abundance may be a commodity investor’s worst enemy, as an oversupply of anything depresses prices, with the global oil glut a prime example.
But many food commodity markets like corn, soybeans, sugar and coffee also have been suffering from too much of a good thing, putting pressure on prices. Although most food commodities remain down this year, there are signs their prices may be bottoming.
The top global producers of arabica and robusta coffee, Brazil and Vietnam, face either stagnant coffee production or low supplies, which is bumping up the demand for the foremost ingredient in a good cup of joe. Corn supplies may also tighten. U.S. farmers planted fewer corn acres this spring after several years of low prices.
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Unlike other commodities, like crude oil and gold, for which production forecasts can be made with some certainty because the supply is relatively well known, forecasts for crop production can change month to month. Those forecasts are harder to pin down because crops are still growing and factors like weather or insect damage can alter harvest totals. Nevertheless, agriculture analysts see indications that heavy supplies for several food commodities may be ending over the next few months, with prices swinging back up.
Breakfast commodities perking up. The “softs” market — the term that encompasses the coffee, sugar, cotton and orange juice commodities markets — especially could see higher prices, particularly for coffee and sugar. Shawn Hackett, president of Hackett Financial Advisors in Boca Raton, Florida, says the “smart money” in softs is betting on a rally in the near term, judging by the position in the futures market. The “smart money” refers to commercial traders of those commodities, whether on the supply or demand side.
Although the U.S. Department of Agriculture forecasts record global sugar production for the coming 2017-18 growing seasons, USDA also cited lower supplies in China and Mexico and record exports. For now, production and supplies will meet the strong production forecast, but there could be a sugar shortage if crops don’t grow to their potential, says Mike Ciccarelli, a commodity and stock trader at Chicago-based Briefing.com. “A little weather blip could make a difference,” he says.
Ciccarelli also says ICE sugar futures prices are moving off their summer lows, trading about 13 cents a pound, a good sign. “There’s minimal downside versus the potential for greater upside,” he says, adding prices could quickly rise to 16 to 18 cents a pound if a problem arises in Brazil, the world’s biggest producer.
The simplest way to trade the sugar market is to use exchange-traded products. Ciccarelli recommends using the iPath Bloomberg Sugar Subindex Total Return (ticker: SGG) exchange-traded note as it has the biggest volume of all the ETPs available. The ETN’s strategy considers the life cycle of the sugar plant.
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Coffee prices also have rallied off their summer lows and are trading around $1.38 a pound. The USDA expects Brazil’s coffee production to fall this year. Coffee trees have a biennial production cycle — strong one year and lower the next — with this year’s output the smaller one. Although Vietnam’s crop is expected to be better than last year, the country is dealing with dwindling supplies, which makes this year a make-or-break for them, Hackett says.
“Clearly, weather over the next crop cycle will be watched like a hawk,” he says. “Especially in Brazil, should the market question the viability of providing a 60 million bag crop, the coffee market could experience a legendary bull move with no coffee stocks at the producer level to stop a runaway advance.”
On top of this, demand for both commodities remains strong, these experts say.
Hackett says investors should consider either the iPath Bloomberg Softs Subindex Total Return ETN ( JJS) or the iPath Bloomberg Coffee Subindex Total Return ETN ( JO) to put on positions across the softs market for coffee and sugar.
Making hay of corn and soybean crop sizes. The grain markets have seen volatile trading this summer, rallying on weather scares and changes in acreage, and then falling as summer weather turned more benign in the Midwest. USDA released its first assessment for the size of the U.S. corn and soybean crop last week, and both were higher than the market expected.
The USDA’s higher estimate for crop size is at odds with weekly data showing corn and soybean growth lagging behind last year’s levels. Investors may want to take that estimate with a grain of salt as Hackett says crop size estimates tend to be “one of the more unreliable and aberrant reports the USDA puts out.”
Ed Cowling, director in specialty asset management within wealth management at U.S. Bank, outside of Dallas, says weather can make a big difference for grain production, especially in August when crops are developing the corn and soybean that later will be harvested. “It’s going to be volatile until we get through pollination and see what the crop is going to do,” Cowling says.
Traditionally, grain prices usually dip from August to September, and that the fall often is a good time to buy, says Sean Lusk, director of commercial hedging for Walsh Trading in Chicago. “Weather and impact on yield will be the driver over the next 30 days,” Lusk says. “Then look for a pre-harvest low in mid-September. What you want to do is wait for the crop to be 35 percent harvested, then buy the market.” Here, too, the ETNs are the way to invest in grains, with the iPath Bloomberg Grains Subindex Total Return ETN ( JJG) the preferred vehicle, he says.
[See: 6 Ways to Invest in Agriculture.]
Hackett, who has followed agricultural commodities for decades, says aside from crop production, the weaker turn in the dollar also bodes well for the markets. “Every commodity cycle, all the longer-term cycles, have the currency as a key feature,” he says. If the dollar is on a downward trend, as he suspects, commodities could see a bigger rebound than just a short-term rally because of the combination of both weaker dollar and the changes to food commodity production and supplies. “We’re expecting a multi-year move higher, like what we saw in 2002-03 and 2010-11, after the decline of the last several years,” he says.
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