Ole Hansen
Arabica coffee may have traded sideways for the last 18 months, but, according to Ole Hansen, Saxo Bank's head of commodity strategy, things could be about to change. Robusta coffee has led the way, but Arabica now also looks like it could be ready to help the market push higher.
Article / 09 June 2016 at 12:24 GMT

Coffee rising, especially if you want sugar in it

Head of Commodity Strategy / Saxo Bank
  • Soft commodities, grains rallying strongly
  • Record long position could see correction
  • Investors watching Brazilian weather

Coffee prices are up, as are those of sugar, and a southern frost 
may give the recent rally a new shot of energy. Photo: iStock 

By Ole Hansen

Soft commodities, which apart from coffee and sugar also include cocoa and cotton, been rallying strongly over past couple of months, as have grains.

While soybeans have led the grain gains after rallying by one-third, sugar has taken the lead among softs with its 29% jump.

The soft commodity sector has rallied by almost 17% year-to-date, primarily driven by strong gains in sugar. During the past few days coffee has joined in, hitting a 13-month high:
Soft commodities
Source: Bloomberg

The reason behind the strong rally for both the sweetener and now Arabica coffee as well has been the emergence of unfriendly weather in Brazil. There is also, however, the renewed strength of the Brazilian real, which is up 20% against the dollar since January

Bothy factors have played their part in sending these two Brazilian output-dependent food commodities on a sharp upward surge. 

Sugar has been advancing steadily since April when concerns about output from India and Thailand (due to drought) supported a move that recently gained yet more strength on the back of the wet, damp conditions in Brazil. 

These developments helped slow the crushing process, leading to bottlenecks at Brazilian ports. The backup was due to ships lining up to take delivery of sugar at a time characterised by heavy shipments to overseas markets, not least China. 

Hedge funds have jumped on the positive momentum wagon, accumulating a record long position of around 223,000 futures and options lots with a value close to $5 billion. While fundamentals such as the rising global sugar deficit remain supportive, such an extended long bet will be OK to hold but after seeing the price jump to the highest level since 2013 the market has increasingly been left vulnerable to a period of long-liquidation. 

Speculative positioning in Sugar

Create your own charts with SaxoTraderGO click here to learn more

Sugar for October delivery trades just below 20 cents/lb which is the highest level for a front-month contract since October 2013. The RSI has moved above 80 and last time this happened was back in March when it helped trigger a 16% correction and the reduction of a net-long position 60,000 lots smaller than the one currently witnessed. 

Sugar, first month cont.
Source: SaxoTraderGO 

Arabica coffee traders have been left frustrated by its inability to break out of the relative narrow range that has prevailed for the past 16 months. Several failed attempts in both directions have seen speculative bets build up only to be squashed by snap reversals.

During the past week, another attempt was seen to the upside and earlier today it reached $1.45/lb. The initial move was primarily driven by spillover buying related to the general pickup in demand for agriculture commodities during the past couple of months. 

A strengthening Brazilian real also played its part. 

Arabica coffee, first month cont.

Source: SaxoTraderGO 

The main spike this week, however, has been driven by forecasts for frost in Brazil – the worlds biggest grower of the Arabica bean – which could hit crops during the coming days. The market is therefore on weather watch to see whether this will be turn out to be another failed breakout attempt. 

While fundamentals may emerge on the supporting side, hedge funds have also done their bit to support the latest surge. While bullish bets on sugar are at a record high, hedge funds just last week turned net-short after two weeks of heavy selling where longs were cut and shorts added. The covering of these shorts has played an important part in the latest surge.
Speculative positioning in Arabica Coffee
If no damage to crops emerges over the coming weeks, coffee could revert lower as fast as it jumped with funds once again being caught out. 

It also helps to explain the record long in sugar, as the rally seen since April has given funds no cause for concerns given how shallow corrections have been during this time. 

Coffee traders now find themselves watching Brazilian weather forecasts 
in order to track their investments. Photo: iStock 

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

09 June
Daniel Vasconcelos Daniel Vasconcelos
I can confirm lots of frosts in southern Brazil (Paraná, São Paulo) but local news says growing regions were not affected as of today, June 9. The Brazilian Real is sharply higher today, currently at 3.38 versus the USD due to the appointment of a new and more competent director of the Central Bank.
10 June
Ole Hansen Ole Hansen
Thank you very much Daniel


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail