Soft commodities are firming up on weather, Ukraine


The fates have been especially fickle when it comes to soft commodity markets in recent months. An extended heat wave in Brazil — a huge sugar and coffee grower — has withered crops, while the polar vortex and frigid temperatures have damaged winter wheat and other crops in North America.

As a result of these global weather events, soft commodities have been standout performers in early 2014 after several lean years.

Also, wheat and corn prices surged Monday morning as investors continued to monitor the escalating crisis in Ukraine, a top grain exporter.

The term soft commodities is trader lingo for crops such as coffee, sugar, wheat and grains that are grown as opposed to hard commodities like metals that are mined.

The short-covering rally in coffee prices this year after a long decline has been the biggest story in the commodities complex so far this year. The iPath Dow Jones UBS Coffee ETN (JO) is up more than 60% so far this year.

JO Chart

JO data by YCharts

The spot and futures prices for agricultural commodities are influenced by climate patterns and extreme weather events as well as shifting supply and demand dynamics in exporting nations like Brazil and big importers like China.

The good news is that overall commodity prices (hard and soft) are starting to stabilize after last year’s market blowout, when slower growth in China and the U.S. Federal Reserve’s tapering of its monthly bond purchases unnerved investors and sparked a sell-off.

So far in 2014, the Standard & Poor’s GSCI Spot Index of 24 hard and soft commodities such as energy products, industrial metals, agricultural products, livestock products and precious metals is up 2.3% as of February 27.

However, performance varies broadly when it comes to individual commodities. Take coffee. Dry weather in Brazil, the world’s biggest coffee producer, to 16-month high as of Feb. 27. Coffee is the best performer in the S&P GSCI Spot Index.

Similarly, sugar prices, which fell in 2013 for a third successive year thanks to a global production glut, have shifted direction and touched bull-market territory, defined as a 20% rise from a recent low. Once again the culprit is the drought in Brazil, which provides one-fifth of the world’s sugar.

U.S. prices for corn, wheat, and soybeans are trading at historical highs and well above pre-2007 levels before the financial crisis. However, the outlook is likely to sour in 2015 and 2016 before recovering later in the decade, according to a new forecast by the U.S. Department of Agriculture.

USDA Grains.png

The USDA is also forecasting a 10.5% decline in average cotton prices this year. The price drop is expected to come from an increase in world stocks to more than 100 million bales in 2014. If so, that would mark the fifth consecutive year world production exceeds demand.

Gerry Sparrow, who manages the Hard and Soft Commodities portfolio on Covestor, has a position in the Market Vectors Agribusiness ETF (MOO). The fund has exposure to grains and other food-related products.

MOO Chart

MOO data by YCharts

The Hard and Soft Commodities portfolio also holds gold and silver ETFs. Sparrow has designed the strategy to act as a potential hedge against inflation.

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DISCLAIMER: The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. ETF shares trade like stocks, are subject to investment risk and will fluctuate in market value. The market price of the ETF’s shares may be more or less than the net asset value. Past performance is no guarantee of future results.