We know that gold and silver prices have been on the rise in recent years. But there are plenty of under-the-radar commodities that have been getting hammered.
Soft commodities – that is, commodities that grow in the ground – are cheap right now. Nearly every soft commodity is trading below its 50- and 200-day moving averages at the moment. Some of them are cheaper than they were two or three years ago.
Take sugar, for example. At $0.216 per pound, sugar is cheaper than it has been in close to a year. It’s also three cents below its 50-day moving average and four cents below its 200-day moving average. Sugar prices have fallen 15% over the past month.
Cotton is another example. The commodity has been in steady decline since peaking at more than $50 per pound in early 2011. Now cotton can be had for about half that price, at $27.54 a pound. It hasn’t dipped below $25 a pound since October 2010.
Corn and cocoa are also cheap, each trading below their 200-day moving averages. Among the major soft commodities, in fact, only coffee is more expensive than it was a year ago.
So does this mean you should be adding as many soft commodity plays to your portfolio as possible while prices are “dirt” (pun intended) cheap? Potentially. But soft commodities aren’t quite like gold or silver. While gold and silver tend to trade more on currency weakness and inflation concerns, soft commodities are subject to things like natural disasters and geopolitical issues, which can make them extremely volatile.
They also tend to trade more or less in tandem with the price of oil, as crude tends to be the single biggest cost input to soft commodity production. That adds another layer of uncertainty to the equation.
But there are certainly reasons to believe that soft commodities will soon be back on the rise. The world’s population is booming, and demand for food is skyrocketing – especially in emerging markets such as China, India and Brazil. Plus, with technological innovations providing farmers with better equipment and techniques, agricultural producers are more equipped to keep up with that demand than ever.
So demand for commodities such as corn, sugar and cocoa should rise, and push prices back up along with it. Given the volatility among soft commodities, it’s difficult to predict when those prices will rise.
But for you resource investors, soft commodities are an intriguing play at the moment.