
Soft commodities, or the “luxury” sector of the raw materials asset class, saw mixed results in Q3 and over the first nine months of 2022. In Q3, world sugar, coffee, and cotton futures posted losses, while cocoa and frozen concentrated orange juice moved to the upside. Since the end of last year, only FCOJ moved higher, but the more than 30% gain since December 31, 2021, was enough to cause a marginal loss in the composite. Cotton was the worst performer through three quarters, posting an over 24% decline. Meanwhile, cotton, coffee, and FCOJ futures moved to multi-year highs in 2022. Sugar reached that milestone in 2021, while cocoa traded in a primarily sideways range.
Soft commodities can be highly volatile as the weather conditions and the potential for crop diseases across critical growing regions dictates supplies. Brazil is a crucial factor in the soft sector as it is the world’s leading producer and exporter of free-market sugarcane, Arabica coffee beans, and oranges. Brazil is also a significant cotton producer. West African countries, the Ivory Coast, and Ghana produce the lion’s share of global cocoa supplies.
While overall commodity prices have been highly volatile in 2022, the soft sector has taken a backseat regarding price variance to grains, energy, and metals.
Sugar declines in Q3 and over the first three quarters
ICE world sugar futures moved 4.43% lower in Q3 and were 6.36% below the December 31, 2021, closing price on September 30.

The long-term chart highlights that sugar rose to a 20.69 cents per pound high in 2021, the highest price since February 2017. In 2021, sugar futures posted a 21.89% gain. The nearby sugar contract settled at 17.68 on September 30 and was higher at the 18.61 cents per pound level on October 10.
While sugar is the critical ingredient in ethanol in Brazil, rising oil and gasoline prices were not enough to push sugar to a higher high so far in 2022.
Coffee fell in Q3 but only posted a marginal decline over the past nine months
The continuous ICE coffee futures contract rose to the highest price since September 2011 in February 2022, when the soft commodity peaked at $2.6045 per pound.

The chart illustrates the rally in the coffee futures market that took the price from a fourteen-year low in 2019 to an eleven-year high in 2022. Coffee futures peaked at over the $3 per pound level in 1977, 1997, and 2011. In Q3, arabica coffee bean futures fell 5.16% and were 2.01% lower than the December 31, 2021, closing level on September 30, settling at $2.2155 per pound. In 2021, coffee futures gained 76.3%. On October 10, the December contract was at the $2.1730 level, slightly lower than the Q3 close.
Cocoa edged higher in Q3 but is still lower on the year
Over the past year, cocoa futures have been the least exciting and range-bound member of the soft commodity asset class.

The chart shows nearby ICE coffee futures have consolidated over the past months, with a slight upside bias of higher lows. At $2,354 on September 30, cocoa futures moved 2.75% higher in Q3 but were 6.59% below the closing price at the end of 2021. Last year, cocoa edged only 3.19% lower, and the tight trading range continued in 2022. On October 10, nearby cocoa futures were slightly higher at the $2,359 per ton level. The weather, growing conditions, and political landscape in West Africa will determine the path of least resistance of cocoa futures.
Meanwhile, since London is the hub of international cocoa trading, many physical contracts use the British pound as a pricing mechanism. The pound declined by 8.34% against the US dollar in Q3 and was 17.37% lower over the first nine months of 2022. The decline in the pound’s value and stronger dollar likely weighed on cocoa prices.
Cotton was the big loser in Q3 and so far, this year, while FCOJ moved in the other direction
Cotton had a wild year, exploding to the highest price in over a decade and imploding when it ran out of upside steam.

The chart illustrates cotton futures rose to a $1.5802 high in May 2022, a level not seen since July 2011. In Q3, gravity hit the cotton futures market, sending the price 17.89% lower. Cotton was 24.21% below the December 31, 2021, closing price on September 30, settling at 85.34 cents per pound. In 2021, cotton rose 44.14%. Nearby December cotton futures were at the 88.23 cents level on October 10, slightly higher than the Q3 close.
While cotton moved lower, frozen concentrated orange juice futures, the most illiquid of the soft commodities, moved in the opposite direction.

ICE FCOJ futures rose 6.54% in Q3 and 30.83% over the first nine months of 2022, reaching $2.0635 per pound in August, the highest price since November 2016, when it reached its record high of $2.35 per pound. In 2021, FCOJ gained 18.70%. The futures settled at $1.9140 on September 30 and were slightly lower at the $1.8900 level on October 10.
Watch the Brazilian real versus the US dollar for clues in Q4 and beyond
Inflation has increased production costs for soft commodities as labor and energy are critical input expenses. Meanwhile, four of the five commodities are highly sensitive to the level of the Brazilian currency. While the US dollar is the pricing benchmark for the softs, Brazilian labor costs are in the local currency. As the Brazilian real rises in value against the US dollar, it pushes production expenses higher and underpins prices.

Since the May 2020 $0.16756 low in the Brazilian real versus the US dollar exchange rate, the Brazilian currency has been trending slightly higher against the US greenback, making higher lows and higher highs. At over the $0.19 level on October 10, the real’s path remains marginally bullish.
The most significant issue for the exchange rate is the upcoming runoff election between sitting President Jair Bolsonaro and challenger, former-President Lula. The polls had indicated that Lula would win the presidency in the October 2 contest, but a stronger-than-expected showing by President Bolsonaro is forcing a runoff on October 30. Lula is running on a far-left socialist platform, while President Bolsonaro is on the other end of the political spectrum. Brazilian stocks and the real rallied after the October 2 election, likely indicating that a second term for President Bolsonaro will push the currency and Brazilian stock market even higher as investors favor a business-friendly government over socialism. Lula currently leads in the polls, but another surprise at the end of the month is possible.
Based on the recent price action, if President Bolsonaro wins the election, we could see higher sugar, coffee, cotton, and FCOJ prices as the Brazilian real rallies against the US dollar. If Lula wins, prices could move lower as the labor component of production costs will likely decline.
While the weather and crop progress are the most significant factors for the path of least resistance of prices, the election could substantially impact prices and volatility in Q4.
Beyond the election, worldwide inflation, the weather, and other factors that impact agricultural products will set the path for soft commodities, which can be one of the most volatile sectors of the commodities market.
More Softs News from Barchart
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