Softs Market

Coffee, Cocoa, Sugar, Cotton and Fruit Futures

The soft commodities markets and the agricultural markets both have the fundamental aspects of planting, growing and harvesting seasons. They differ in that the majority of the softs markets are primarily grown, with the exception of orange juice, internationally. They are grown all over the world and their prices are affected by global supply/demand. Like agricultural products farmers, manufacturers and end users utilize the futures markets to lock-in prices and manage respective risks.  As a consequence, there is a significant amount of speculative interest for soft contracts, including cocoa, coffee, cotton, sugar, and frozen concentrated orange juice (FCOJ).

Highlighted Contracts

Cocoa – Most of the world’s cocoa is grown in a narrow belt 10 degrees either side of the Equator because cocoa trees grow well in humid tropical climates with regular rains and a short dry season.  The trees need even temperatures between 21-23 degrees Celsius, with a fairly constant rainfall of 1000-2500mm per year.  Harvesting time of the main crop usually happens in October to September, while the mid-crop is harvested anywhere from May to June.

Coffee – When grown in the tropics, coffee is a vigorous bush or small tree that usually grows to a height of 3–3.5 m (10–12 feet). Most commonly cultivated coffee species grow best at high elevations, but are nevertheless intolerant of freezing temperatures.  The tree of Coffea arabica will grow fruits after three to five years, and will produce for about 50 to 60 years (although up to 100 years is possible). The white flowers are highly scented. The fruit takes about 9 months to ripen.

Brazil is the world’s largest coffee producer and as such weather changes that occur there can dramatically affect the price internationally. Produced and consumed globally (Indonesia and Vietnam for example) the price of coffee can also be affected by fluctuations in various currencies. Interestingly, because it takes up to 5 years for a tree to produce fruit, many farmers are less reluctant to expand or reduce production based on shorter term/current demand. This can produce extended longer-term price cycles.

Sugar – Sugar futures have traded since 1914 and options on sugar futures were introduced in 1982.  One Sugar No.11 contract represents 112,000 pounds of raw cane sugar. These contracts and options are used by the global sugar industry to price and hedge numerous transactions.  In addition, sugar’s role in ethanol production increasingly makes it both an energy and food commodity.  Considered a hot weather plant, sugar cane is largely grown in South Asia, Brazil, the Caribbean Basin and the southern United States.  Sugar beets are grown in cool temperate zones such as the northern Great Plains, Germany and France. 

Reports to Watch

USDA World Agricultural Supply and Demand Estimates Report
USDA Crop Production

Resources

International Cocoa Organization (ICCO)
International Coffee Organization (ICO)