By Andy Hecht, author of “How to Make Money with Commodities”
On October 15, 2013, we took a look at the action in soft commodities. Since then, one of the luxury commodities has made a new low, one is marginally higher, and the other has exploded.
Sugar: The Potential Bottom Gave Way to New Lows
In October, I opined that sugar could be forming an important bottom. How wrong I was! The price of the sweet commodity continued to fall, making a series of lower lows and falling to 14.70 cents on January 28, 2014. Since then, reports of a dry and hot season in Brazil, the world’s number one producer and exporter of sugar cane, caused the price of sugar to turn and rally 1.4 cents, or 9.5%, in the span of six trading sessions. The speculative short open interest as reported in recent commitment of trader data began to grow in 2014 as traders anticipated a huge sugar cane crop. Alas, Brazilian dry heat has ruined the shorts’ party, at least for the last week. And, the forward curve for sugar is still in contango. There are progressively higher prices for deferred contracts–market prices are forecasting a higher sugar price in the future.
Perhaps sugar has now put in a bottom as weather may cut the size of this year’s sugar crop. A key reversal on the weekly chart (a new low and close above the prior week’s high) that occurred the week before last may be just what sugar needs to move higher and maintain bullish momentum. This market may be in the very early phase of a sharp correction.
Coffee: A Wild Ride. Is it Just the Beginning?
Over the past week, coffee has demonstrated what the potential may be for this luxury sector.
The forward curves in all of these soft commodities are either flat or in contango. Growing population and wealth means more people on planet earth will desire more luxury commodities. Increasing demand for chocolate should keep the long-term bull market in cocoa grinding higher while coffee has shown what a weather shock can do to the price of a commodity over a very short period of time. Could a similar move in sugar be brewing?
As I wrote in October, “Identifying a potential bottom or top in these traditionally volatile commodities will be very satisfying to those nimble traders who understand the nature of supply and demand and monitor the price cycles. Market structure or forward price data can often spotlight where a commodity is in terms of its price cycle.” Don’t forget to watch the weather conditions in growing regions – any change can turn a market on a dime.
My bullish target for coffee is 1.50
Cocoa: The Maturing Bull Market
Cocoa has held it’s rally and moved marginally higher since October.
The mature bull market in cocoa continues to grind higher. The weekly chart since October 15 shows a series of higher lows and higher highs. Historical volatility has dropped as the move higher has been slow and steady and marked by a series of corrections, which may just be profit-taking by those with long positions. The forward curve in cocoa is flat, meaning that deferred prices are at, or close to, active month prices. A weak crop from huge producers in West Africa (Ghana and the Ivory Coast) and weather issues in other producing countries (Indonesia and Brazil) have had a bullish effect on the supply side of the equation. And, demand for chocolate continues to grow with Asia consuming a record amount of chocolate this year.
The next important level in cocoa is the $3,000 per ton benchmark. If the price can get above this level, it is possible that cocoa could make an attack on the all-time highs established in 2011 at $3,800 a ton. The cocoa bull market continues and has matured like a fine wine. The next target for cocoa is North of 3200.
These commodity commentaries first appeared on the website of CQG, Inc, and are copyright © 2014 to them.
To read Andy Hecht’s other commentary articles, visit http://news.cqg.com/commentary/the-commodity-strategist.
Andy Hecht is a sought-after commodity trader, options expert, and analyst who spent nearly thirty-five years on Wall Street. Hecht contributes to Traders Magazine and consults for companies involved in producing and consuming commodities. Hecht also guest lectures on commodities at the University of Colorado Denver Business School. His first book, How to Make Money with Commodities, published by McGraw-Hill, was released in January 2013 and is available on Amazon. Hecht hosts a biweekly radio show: The Commodities Hour with Andy Hecht.