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market | IST

Explained: Why are soft commodity prices touching multi-year highs?

Soft commodities—the commodities that are grown rather than extracted or mined—are surging with oil and metals. Global sugar and cotton prices have touched 21-week highs, with sugar trading above $18 a pound. Soft commodities are futures contracts on underlying agri products, and are among the oldest traded products in the world. Recently, these products have seen a hike in prices.

Soft commodities—the commodities that are grown rather than extracted or mined—are surging with oil and metals. Global sugar and cotton prices have touched 21-week highs, with sugar trading above $18 a pound.
Soft commodities are futures contracts on underlying agri products, and are among the oldest traded products in the world. Recently, these products have seen a hike in prices.
One of the factors responsible for the surge is lower production in global market. Even India's exports are slowing. The cold frost in Brazil is damaging the standing crops, leading to decreased production.
"Brazil is adding a lot of uncertainty in the sugar as well as in the coffee markets. For both of these markets Brazil is the major producer and with it, there is a lot of uncertainty. Predicting the impact of frost on the crop is difficult because you need to see if it is growing back or not," Stephen Vogel from Rabobank said.
Coffee prices are surging to multi-year highs due to supply shortages, also caused by bad weather in Brazil. This week, Arabica coffee surged prices never seen since 2014.
"In coffee, this might be a multiyear issue where the impact of the frost is relevant even in production years later in the next season and the seasons thereafter,” Vogel added.
“So clearly, coffee has gained a lot just because of this weather phenomenon in Brazil, which is in my mind the worst we have seen in 25 years. So we have already made it through two rounds of frost and now there is a third round of frost in the makings and this is clearly helping those two soft commodity markets coffee and also sugar," he said.
Talking about whether the prices will cool, Vogel said there is no reason to think so.
“Everybody is trying to evaluate the frost damage and once we have a better signal, then the market will have to react. But for now, there is no reason to think that these prices will collapse very quickly because the uncertainty is very high in those markets,” Vogel said.