What is driving soft commodities?

Supply and inflationary pressures have spread across agricultural markets, with prices for soft commodities including sugar, coffee, and cocoa all well up double digits since early 2020. What are the drivers? And is it a good time to invest in food commodities?

Food costs have been moving higher since their lows during the first half of 2020. The list of drivers is long: transport bottlenecks, farm labor shortages, volatile energy markets, and meteorological factors have all increased production costs over the past two years. On top of that, the war in Ukraine has led to additional trade disruptions, adding to inflationary pressures. And because commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with an appropriate hedge against inflation.

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Soft commodity market driven by multiple forces

Soft commodities have been on a profitable run over the past few months as investors are re-entering the market. Looking at the price chart, they appear to have established a bullish trend, with some up nearly more than 50% since January 2020, driven by often similar and sometimes different fundamentals.

Sugar likely to move in tandem with oil prices (ETN ticker: SGG)

Sugar futures prices soared 22% in 2021 as elevated energy costs encouraged mills in top sugar-exporter Brazil (20% of global production), to dedicate last year 54% of sugarcane to producing ethanol (an alternative source of energy to oil). La Niña-induced drought conditions also reduced the sugarcane harvest in South American country by 14%, exacerbating an already tight global supply outlook. And the outlook is to remain uncertain as European farmers, the third-largest producer of sugar (9.2%), are likely to plant fewer sugar beets as prices skyrocket for crops like wheat, barley, rye, and oats, for which Russia and Ukraine are key suppliers.

Coffee supported by unfavorable weather conditions (ETN ticker: JO)

Extreme weather conditions boosted the prices of coffee as production by the top producer (Brazil) fell by more than 20%. Arabica coffee futures soared 76% in 2021, and to the highest levels since 2014. For the 2022/23 season, while it will be the higher-yielding season, there is plenty of uncertainty over the impact of both drought and frost. In addition, supplies from Vietnam, the world’s largest Robusta exporter also suffered last year, with output down by more than 7%. Covid-19 restrictions and container shortages (which have led to high freight rates) weighed on exports. And while some of the production concerns have eased with good rainfall lately, one needs to keep an eye on how the Cvodi-19 and logistical issues evolve, as these could continue to provide support for the coffee price.

Cocoa may return to USD3’000 as demand picks up ETN ticker: NIB)

Cocoa futures were the only soft commodity that posted a loss in 2021, as the primary ingredient in chocolate fell 3%. Record cocoa production from both the Ivory Coast and Ghana in the 2021 season ensured that the market finished the marketing year in surplus. But looking at a longer picture, cocoa prices are in an upward trend, and so far this year, they have climbed more than 5.2%. The continued reopening of economies, the pick-up in international travel, and concerns over dry weather in top producer Ivory Coast have been constructive for the demand picture, forcing the market to look ahead to the 2022 season, with the expectation that the market would return to the deficit. Moreover, concerns about ethical and sustainable cocoa production, and aging trees' vulnerability to pests, may limit midterm output growth even as structural demand is set to increase.

What could propel prices higher from here?

Demand shocks have been the dominant force behind non-oil commodity price cycles. Sales growth and outlook of food companies, and consumer spending trends in the US and Europe are very encouraging. During the Covid-19 pandemic, governments and central banks injected unprecedented amounts of liquidity in a bid to mitigate the long-term economic damage. This strengthened household balance sheets and reinforced the job market, with unemployment rates falling. This suggests total demand is expected to grow further from here, potentially leading to above-average inflation, and hence a favorable environment for commodities.

Climate change and unpredictable weather conditions are likely to continue to affect the soft commodity market in the future. Increasing climate changes and unfavorable weather conditions are hitting the biggest soft commodity producers in different manners. The recent dryness that was visible in West Africa in early 2022 is increasingly common in recent years, while the increased rainfall variability in Brazil is leading to significant losses in coffee and sugar production.

Brazilian real: Brazil is the leading producer and exporter of soft commodities including Arabica coffee beans and sugarcane. A rising real (BRL) tends to push the price of these commodities higher as it increases domestic production costs. In Q1, the Brazilian currency broke out to the upside against the US dollar, even though the dollar gauge rose 2.9%, meaning the real did even better against other world foreign exchange instruments, adding further pressure on prices. Looking at the price, the potential for further appreciation in real remains intact as it just broke above the major resistance level.

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High oil prices tend to lead to higher sugar prices. Brazil has a long history of producing ethanol (a biofuel) from sugarcane. Sugar is also produced from sugarcanes. Since the production of ethanol and sugar competes for the same raw material, it is straightforward that an increase in oil prices would divert away resources from the production of sugarcanes, contributing to the price rise of sugar. And as the uncertainty in oil supply is expected to endure, the upside risk for sugar remains high.


Soft commodities can be one of the most volatile sectors of the commodities market, and the price variance often occurs when market participants expect them the least. Clearly, a lot depends on how long the inflationary cycle will last. But weather conditions, strong demand, imbalance in energy markets, and shortage of goods are painting a favorable backdrop for soft commodities. Even if part of the move is already done, there could be more to come. These are inflationary times.