Soft commodities also referred to as 'softs,' are a group of commodities that are grown rather than mined. A couple of common examples of softs include coffee, sugar, cocoa, cotton, and corn. The past couple of years have proven to be extremely difficult for investors who hold these types of commodities, but recently there has been increased discussion of a reversal. In the article below we’ll take a look at several exchange-traded products that have been designed to track this particular segment of the commodities market and try to determine if the renewed hope is warranted and potential trades to make over the upcoming summer months. (For more, see: Active Traders Are Turning to Soft Commodities for Answers).
iPath Bloomberg Softs Subindex Total Return ETN
There are few products designed to track soft commodities. However, the most popular ETN that has been around since June 24, 2008, is the iPath Bloomberg Softs Subindex Total Return ETN (JJS). Taking a look at the five-year weekly chart below, you can see that the price has been under pressure from the bulls since failing to overcome the resistance of the 200-week moving average earlier this year. The shift lower has now pushed the price toward an interesting level of support shown by the dotted trendline. Active traders will likely look at eye on this dotted level and try to time entries around this point in case of a bounce higher. With that said, long-term bulls will likely choose to remain on the sidelines until the price shows stronger signs of reversing. Some may even wait for the price to rise above one of the long-term moving averages (shown by the blue and red lines). (For more, see: Active Traders Are Turning Bullish on These Commodities).
One of the major holdings of the JJS ETN is in futures contracts of coffee. Some estimates suggest that more than 2.25 billion cups of coffee are consumed around the world each day, and the demand is showing little signs of reversing. Taking a look at the iPath Bloomberg Coffee Subindex Total Return ETN (JO), the price seems to have found a support near a long-term base shown by the dotted trendline. Active traders would expect the bulls to start stepping in around this level and prevent the price from a continued slide. While a bounce could be significant in percentage terms, the underlying trend is still downward, which suggests that bulls will likely set fairly tight stop-losses in case the downward momentum continues. (For more, see: How to Trade the Move in Coffee).
It would seem remiss to analyze coffee without also taking a look sugar since the two are almost always found next to each other. Taking a look at the chart, you can see that the downtrend is similar to that shown above. In this case, traders will also use the nearby support to signal the likely chance that the bulls will step in near the dotted trendline and prop up the price. (For further reading, check out: Trading The Soft Commodity Markets)
The Bottom Line
Commodity traders have shunned soft commodities over recent months due to severe downtrends. However, at this stage, it looks as though strategic traders will want to look at this group again because the prices are nearing major support levels and could be poised for a significant bounce. (For more on this topic, check out: The Charts of These Soft Commodities Suggest Prices Are Headed Higher).
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.