Soft commodities may be the most volatile sector of the commodity market, as prices routinely change their value during their pricing cycles. The path of least resistance to luxury goods prices is a function of climate and crop disease in critical growing areas worldwide.
Still, the demand side of the fundamental equation shows an increasingly addressable market for these products as the world’s population grows by 15-20 million people each quarter. Since 2000, the number of people living on our planet has increased by approximately 27.3%.
Which is equivalent to more than 1.64 billion people, according to the United States Census Bureau. More people with more money who consume more coffee, cocoa, sugar, cotton, and orange juice every day underpin the prices of these products.
However, the first-quarter coronavirus outbreak weighed in all markets, and soft products were no exception.
Composed of five soft products, sugar, coffee, cocoa, cotton, and frozen concentrated orange juice, recorded two consecutive years of earnings in 2015 and 2016. At the end of 2017, soft products decreased by just 2.25% for the year.
In 2018, the commodities ended with a loss of 5.68%. Moreover, in 2019, the sector moved up 3.47%.
In the first quarter of 2020, soft raw materials recorded a loss of 8.79% during the three months.
Dollar Index Weighed on the Prices of all Commodities
The dollar is the world’s reserve currency. It is the reference pricing mechanism for most products, including those of the soft or tropical variety.
The dollar index moved 3.16% more in the first quarter, which weighed on the prices of all primary products. Moreover, the dollar moved considerably higher against the Brazilian real in 2018. And the real remained weak throughout 2019 with other emerging market currencies. In the first quarter, the real fell to a new lower low below the $ 0.20 level.
Brazil is the world’s leading producer of three of the sector’s five primary products, including sugar, coffee, and oranges. The weak real did not support prices for all three products in the first quarter. As it fell below the low end of its trading range.
However, the weather is always the most critical problem when it comes to the size of annual crops and the direction of prices.
Coronavirus will continue to influence the demand for soft products in Q2
Like all agricultural products, demographics continue to provide a growing base of support for these food products. With wealth increasing in the world’s most populous country, China, competition for food continues to rise, putting pressure on supplies.
As we move into the second quarter, it will be weather and crop problems that determine the path of least price resistance, as demand will continue to favor the highest lows, says Andrew Hecht, an analyst at Seeking Alpha. However, the impact of demand can be slow and constant. While excess supply or deficit tends to shock markets and cause the most significant price movements both up and down.
According to the analyst, the outbreak of a global pandemic that caused a deflationary spiral in the first quarter will continue to impact demand for primary products in the second quarter. At the same time, the potential for export problems for producing countries, particularly in South America and Asia, could create a shortage that would increase price volatility. Bullish and bearish factors face the majority of commodities in the sector, entering the second quarter of 2020.
Hecht says the first quarter was a unique set of challenges for the sector. The outlook of the second quarter demand on the weather, currency markets, and the coronavirus pandemic.
- Trading Instrument