‘Soft’ commodity prices anything but soft

by Ron Sterk
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As 2010 progresses into its latter half, little has improved in the domestic supply and pricing situations for the traditional “soft” commodities of sugar, cocoa, coffee and frozen concentrated orange juice.

Notwithstanding a general sell-off in futures markets early last week when equity values plunged on fresh global economic worries, prices on the Intercontinental Commodity Exchange (ICE) in New York for all four soft commodities ended June in strong positions. Prices in the most active nearby contracts were little changed from the first of the year for domestic raw sugar (No. 16), cocoa beans and frozen concentrated orange juice, while world sugar futures (No. 11) were down about 30% and coffee prices were up about 15%. Compared with prices on June 30, 2009, late June 2010 values were up for domestic sugar (over 45%), cocoa (about 20%), coffee (more than 25%) and F.C.O.J. (about 50%). Values for world sugar were down about 15%.

Cash prices for the two related commodities tracked by Food Business News were up significantly from the first of the year and from a year ago. Midwest beet sugar prices were up more than 40% from a year ago and up 50% since Jan. 1, 2010, while 10% to 12% natural cocoa powder prices were up 15% for the six months and up more than 60% from 12 months ago.

Domestic sugar up sharply

Sugar perhaps needs the greatest explanation since domestic raw prices have risen sharply over the 6- and 12-month periods while world raw values have declined during both time periods.

Domestically, refined sugar supplies are extremely tight and are expected to remain so until new crop beet sugar becomes available in the fall. With most beet processors sold out of 2009-crop sugar, some have sold new crop supply for delivery before 2009-10 ends Sept. 30, hoping for early crop maturity. Strong crop ratings in the key Red River Valley region of North Dakota and Minnesota so far have been encouraging.

Cane refiners have been forced to import high-tier tariff raw sugar above the tariff rate quota (T.R.Q.) in an attempt to push out enough supply to meet demand. Refiners pay a duty on high-tier imports, which has “worked” because the price spread between domestic raw futures and world futures on ICE has been large enough to cover the duty, freight and other costs. Still, at mid-June traders said one cane refiner had fallen behind in timely delivery of refined sugar.

Sugar demand, meanwhile, has remained strong, a combination of delayed purchases by some users who waited for lower prices, good demand for sugar-containing products and continued switching to sugar from high-fructose corn syrup by some food and beverage manufacturers.

The hope for sugar users is an increase in the T.R.Q. import level by the U.S. Department of Agriculture. Users have asked the U.S.D.A. for such an increase more than once over the past several months, and in June sugar users and suppliers made a united request for an early announcement of the 2010-11 T.R.Q. so exporters may have shipments at U.S. ports by the start of the new marketing year on Oct. 1.

The U.S.D.A. has been silent on the latest requests, but the department raised the T.R.Q. by 200,000 short tons, raw value in April, bringing the 2009-10 T.R.Q. to 1,431,497 tons. In March the office of the U.S. Trade Representative reallocated about 90,000 short tons of T.R.Q. supply to exporters who had additional supply to ship from exporters who indicated they would not be able to ship their quota.

Duty-free shipments from Mexico to the United States so far in 2009-10 have been a

disappointment, with shipments down about 70% in the first six months of the marketing year compared with a year earlier. Smaller-than-expected cane crops in Mexico this year and last year left that nation with short supplies and high refined prices, resulting in large imports late in 2009 and a small amount in 2010. Mexico’s economy ministry has indicated it will not need to import any more sugar this year, but additional shipments to the United States are unclear.

The globally tight sugar supply situation that sent prices to near record levels last year has vastly improved as production in India, the world’s largest sugar user, and in Brazil, the largest producer, has recovered from weather-reduced outturn the previous year. As a result, world raw sugar futures prices declined sharply.

Cocoa demand elastic

While sugar demand has appeared somewhat inelastic during the global economic downturn and tight supply situation, cocoa (chocolate) demand has been quite elastic. As the economy sank, consumer demand for “high-end” chocolate, which uses cocoa butter, also plummeted. At the same time cocoa powder demand rose as manufacturers switched to compound chocolate (cocoa powder and vegetable oil) in place of cocoa butter and powder, in some cases. Cocoa butter stocks grew to the point processors cut back or shut down completely in some cases. Since nearly equal amounts of butter and powder are made in the processing operation, powder supplies tightened. At midyear cocoa butter inventories were at a 10- to 1-ratio in some warehouses, cocoa traders said.

As with sugar, some users held off covering 2010 cocoa powder needs when prices began rising, and were forced to buy at even higher prices. Some specific grades of cocoa powder were not available at any price, and in many cases new orders could not be shipped for 6 to 12 weeks as cocoa processors were sold out of powder and only made new as cocoa butter sales also occurred. Trade sources expect little if any improvement in powder availability or lower pricing for several more months with 2011 prices only a few cents below spot values.

The International Cocoa Organization forecast a 4% increase in cocoa demand in 2010-11, but also a surplus in cocoa bean production over demand. Still, the cocoa butter-powder supply imbalance must correct before buyers may expect powder prices to fall, and the organization expects prices to remain high through 2011, in part due to supply uncertainty in the top producing region of West Africa.

Coffee futures on the upswing

Coffee futures prices hit 12-year highs in New York after gaining more than 25% in June on a combination of good physical demand despite the slow economic recovery, tight stocks, weather concerns in top-producing Brazil and speculative buying. But similar to sugar, the current coffee crop in Brazil was termed “huge” by traders with arabica harvest ahead of last year at over 30% completed as of June 23 and total harvest (including Robusta) over 40% done.

Typically the large crop in Brazil would push prices lower, but analysts suggested the quality of the crop may be in question, with ongoing tight arabica stocks holding prices up. Some major coffee roasters raised prices earlier in the year.

Small orange crops expected

Brazil again comes into play in the orange juice market. As with sugar and coffee, the Latin “giant” is the world’s largest orange juice producer as well as the largest exporter. Brazil’s orange crop was expected to be the smallest in seven years, while the U.S. crop was estimated to be the third smallest in the last 30 years, with most of the loss in Florida, the top orange juice producing state. U.S. orange juice outturn was forecast by the U.S.D.A. to drop 20% in 2009-10, to the lowest level in 11 years.

U.S. juice companies increased retail prices 5% to 9% earlier in the year, which had a detrimental effect on demand, which already had been falling for over a decade. Large carry-in stocks of orange juice and lower consumption forecast for 2009-10 were expected to limit the impact of lower production.

A greater concern for Florida orange growers and F.C.O.J. futures traders was the Atlantic hurricane season, which was forecast to be one of the most active on record. That was illustrated June 29 when many commodity markets turned sharply lower but most F.C.O.J. contracts closed with modest gains as tropical storm Alex intensified.

Weather also was a key factor in the global sugar and coffee supply situations the past couple of years, and it may be again for domestic sugar. The sugar industry has a wary eye on the Atlantic hurricane season, hoping to avoid a repeat of 2005 when Hurricane Katrina temporarily shut down two Gulf sugar refineries and sent prices to multi-year highs. This year, sugar prices are starting out well above the Katrina highs.

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