antly because of the fickle nature of consumer tastes. Thishas been particularly evident in the soft drink industry,where changing formulas is a high-risk decision.4. In nonindustrial usage, demand tends to be inelastic because the cost of sugar is not a significant amount of theuser’s budget.Therefore, projecting consumption can be relatively simple. Ifthere has not been an extremely active bull market in recent seasonsthat would substantially increase plantings (especially of perennialcane sugar), the previous usage gains for the last two to four cropyears can be used. If there has been a bull market recently, then youcan anticipate a modest consumption decline.
Price ForecastingSugar pricing has an unusual pricing history. Many analysts liken itto the “tulipomania” that occurred in seventeenth-century Holland.It was a period of speculative frenzy that drove tulip bulb prices toincredible heights—only to crash with equal momentum.The 1974 bull sugar market is a good example. At the marketheight in November 1974, sugar prices had increased eightfold over1973 levels. In the final months of this wild bull rally, futures pricesshot up 36 cents per pound in 2 months. Thirty-six cents is threetimes higher than the prior post-World War II high!It started with some very bullish fundamentals. The year-end(1973 –1974) stock-consumption ratio was a low 20 percent. The sugar beet crop in Europe was faced with some adverse growing conditions. Fundamentals might account for 20- or 30-cent sugar, but itmore than doubled that price to over 65 cents. There was talk of dol-
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lar-per-pound sugar. Then it came down faster than it went up, leveling in the 15- to 20-cent range. A similar market “panic” occurredin 1980. It was not as severe, but sugar rallied to 45 cents a poundthat time.The price differential between world raw sugar and U.S. No.14 raw sugar can be great at times. During the first quarter of 1999,the gap between the two was the largest since 1987—an average22.48 cents per pound for the U.S. product compared with about6.75 cents per pound for world raw (f.o.b. Caribbean Contract No.1). The differential occurs because the United States controls the imports of sugar, whereas the world price can be affected by surplussugar being dumped onto the market, particularly from the European Union which has sugar price supports about 40 percent aboveU.S. levels.The point is that sugar has a propensity to move way beyondwhat could be expected based on fundamentals. It can be a veryemotionally driven market. Remember that if you’re thinking oftrading sugar.
Technical AnalysisBecause of its emotional nature and unusual pricing history, sugarcan be traded using technical chart formations. They will catch thebig moves.The seasonal pattern projects the annual low around Septemberand the high in January or February. The cycles for sugar have beendescribed as “bizarre.” They are characterized by extremely sharp butrelatively short-lived upside bursts, followed by extended periods ofdormancy at depressed levels. This may be the result of some fundamental factors, such as the year-long harvesting of the crop.
OVERVIEW OF THE COFFEE MARKET
The first common usage of coffee has been obscured in antiquity.Most scholars of the subject believe it was probably first used in ancient times in Ethiopia. From there, its popularity spread throughout the Arab world and then Turkey. Around 1600, its use movedthrough Italy to the rest of Europe, including England, where coffee-
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houses became important centers of commerce in London. Tea laterbecame the favorite drink in the United Kingdom and its colonies,including the United States, until the American Revolution changedtastes here. Today the United States is the world’s largest coffee consumer.
Arabica Versus RobustaThere are basically two types of coffee. The most popular and mostin demand is arabica. It is a mild coffee grown mainly in Brazil,Colombia, and other parts of Latin America. Arabicas make the richest blends. Best-quality arabicas (“milds”) grow from 2,000 to 6,500feet, with quality rising the higher above sea level one goes. Brazil’sarabicas (the less esteemed “natural” type) are grown from 650 to2,500 feet.Robusta coffee comes mainly from Africa and Asia, but also increasingly from Brazil (the conilon type). It is grown from sea levelup to 2,500 feet and is more resistant to pests and heat, but not tofrosts, than arabica. Robustas, which have a more powerful tasteand are less aromatic than arabicas, are used mostly in blends andfor instant coffees.Young coffee trees begin bearing at about 4 years of age andcontinue for about 25 years. Each tree produces enough beans (onan average) to make one pound of marketable coffee each year. Thetrees begin the process by producing a white flower, followed by aberry, usually called a “cherry” because that is what it looks like. Thecherries are originally green and turn red as they ripen. At harvest,the berries are handpicked and consist of sweet pulpy fruit usuallycovering two flat beans.Once picked, the fruit can be processed into coffee beans by oneof two ways—both today are equally as common. The wet method,whereby the beans are washed in fermentation tanks after the outer pulp has been mechanically removed, is used almost exclusivelyfor mild arabicas, and the dry method is used for robustas and natural arabicas. Here berries are mostly dried in the sun to remove thepulp, so dependable weather is very important.When the initial process is complete, the beans are sized andgraded. Then they are packed into heavy bags (132 pounds each) forstorage or shipment. Most beans are moved to New York, New Or-
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leans, San Francisco, Le Havre, or Antwerp for roasting, blending,and packaging for the customer.
Supply Versus DemandEven though the United States is the world’s major consumer of coffee, coffee is not consumed to quench thirsts, nor does it have anynutritive value. Its popularity depends on its use as a stimulant (caffeine). It tends to be emotionally addictive. Millions and millions ofpeople “need” a cup of coffee to get going in the morning.This makes a very inelastic demand situation. Prices have toincrease drastically to make an impact on demand. Therefore, theshort-term demand can be calculated fairly accurately. The longterm is not as clearly defined. Soft drinks, many of them with caffeine as part of their formula, have made an impact on usage. Manyyoung adults prefer a soda in the morning, rather than a cup of coffee. This has already slowed the demand growth rate, particularlyin the United States and some European countries. This, along withsaturation in some mature markets, is a potentially negative longterm factor. Moves have begun in the United States, however, to encourage the young to rediscover the “coffee habit.”The supply side of the equation is the one that often impactspricing. The coffee tree is not a dependable producer. Its yield canvary sharply, partly because of the tree’s biennial cycle, but weather and husbandry practices are also key determinants.In Brazil’s coffee zone, where there is a perennial danger offrosts in June and July, subzero temperatures, or just the threat ofthem, will send prices soaring. Toward the equator, areas above6,000-feet sea level are also vulnerable to freezes. Another threatto production, especially in Brazil in September and October, isdrought, which can hamper the trees’ flowering and thus fruit production. Although coffee needs plenty of rain (at least 40 inches ayear), very heavy downpours can damage the flowers. Other problems include high winds, pests, and diseases.
SeasonalityCoffee is unique in that there is no clear-cut seasonality to its pricing, partly because the commodity is harvested throughout the year.
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As long as there are no supply shocks, beans are usually readilyavailable, while demand can often be met from stocks, as green (unprocessed) coffee can be easily stored for long periods without lossof quality.
Price DeterminantsAs discussed earlier, weather is the major determinant of price inthe short term. However, there are other factors you must track.Transportation is one. Coffee must move from its origin to where itwill be processed and consumed. Anything that interferes with thismovement (dock strikes, war, etc.) will impact price.Inventories can help limit the market’s upside potential attimes of crop problems. Roasters (processors) have, during the1990s, become accustomed to living with much lower stock coverthan would once have been thought safe, as they increasingly follow a just-in-time buying strategy. This is potentially very risky, asthe 1997 price boom proved.Government restrictions can also figure in. The producingcountries are considered to be somewhat unstable in some circles.Brazil at one time went as far as to burn much of its crop in an attempt to manipulate prices.The International Coffee Agreement, administered by the London-based International Coffee Organization (ICO), was a key factor in pricing from 1963 until mid-1989. Its system of export quotasaimed at keeping the market within a price band acceptable to itsimporting and exporting member countries collapsed. Followingthe failed attempt in 1992/1993 to renegotiate the returns of ICOquotas, the Association of Coffee Producing Countries (ACPC)was formed. This producer cartel aims to ensure market stabilitythrough the imposition, if necessary, of limits on exports. However,it has had little impact because all sales limits are voluntary and areoften ignored. The fact that 30 percent of world production is outside the ACPC’s orbit is another drawback. However, the agency’sactivities need to be watched, as the agency has the potential to become a force in the market. The ICO today is a clearinghouse for statistics on coffee and a talking shop for its producer and consumermembers (which no longer include the United States). No moves areenvisaged to restore its old market-regulatory powers.
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Understanding the impact of the supply-demand equation requires attention to a lot of data available from the USDA, the NCA,and the ICO.
Trader’s NotesTrading weather markets is a tricky business at best. Trading coffee isthat much more complicated because it is a very thin futures market.This means that even a small amount of trading activity can result invery wide price swings. In other words, it can be very dangerous.Since arabica contracts are traded on the New York Coffee,Sugar and Cocoa Exchange and robusta is on the London Exchange,some traders spread these two types of coffee depending on theprice relationship. Intracontract spreads are less interesting becausethere is basically no crop year.OVERVIEW OF THE COCOA MARKET
Cocoa is an ancient crop and drink of Central America. At times, itwas important enough to be used as a medium of exchange. Cocoaappeared in Europe in the sixteenth century, but it wasn’t until 1828that a Dutch processor discovered that the fat of the cocoa bean,called cocoa butter, could be extracted. Combining sugar with thecocoa butter produced chocolate. Later, nineteenth-century Swisscandy makers pioneered the use of adding milk to the cocoa butterand sugar and gave the world its first milk chocolate.
Supply SideCocoa beans grow on trees in tropical climates. They grow in an areathat is between 20 degrees north and 20 degrees south of the equator and require at least 50 inches of rain per year. It takes 5 years forthe trees to produce a bean crop. After that, the trees yield for another 40 to 50 years, with peak production coming around the fifteenth year.Output was once fairly price-inelastic. However, it has becomemuch more sensitive to market movements, starting in the 1990s, because of deregulation, which has put an end to state-guaranteedprices to farmers nearly everywhere (including the Ivory Coast in
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1999). The main reasons for the decade’s underlying upward production trend, however, were productivity gains from the extensivereplanting with high-yielding clones in Africa and the steady rise inIndonesia’s planted area.In the major producing countries (Ivory Coast, Ghana, Indonesia, Nigeria, Brazil, Cameroon, and Malaysia), the main cropcomes in from October through March. This accounts for threequarters of the world’s production. A “mid-crop” is harvested fromMay to August. The reason for these long harvesting periods is thatthe cocoa bean matures slowly and unevenly. With the productionin the tropics and the majority of consumers in the temperate zones,the bulk of the crop must be shipped to the confection manufacturers. This makes transportation an important part of the priceequation. The bean cannot be stored in the tropics without beingprocessed. Historically, all the processing (and therefore, inventoryheld) was done in the developed, user countries, especially the United States and Europe. Producing countries, however, are now doingmore processing themselves to add value to exports. Brazil has ledthe way, partly because of growing local chocolate demand, followed by Malaysia and more recently by Africa, especially the IvoryCoast. It now grinds 20 percent of its crop and wants to raise the figure to 50 percent.Origin processing creates another level of inventory in theshape of cocoa products. There is also a third inventory level. Industry in importing countries holds perhaps 4 to 6 weeks’ supply,and they often trade substantially more.Until recently, the International Cocoa Organization (ICCO)also held stocks of cocoa accumulated before its market-supportbuying operations were halted for good in 1988. Its holdings, however, were liquidated through regular monthly auctions betweenOctober 1993 and April 1998.The processing of cocoa beans is complex. First, the ripe fruitor pods are cut from the trees, which grow to a height of 25 feet. Thepods are split, and 20 to 40 seeds (beans) that look like almonds areremoved. The beans are then fermented for 2 to 9 days. This kills thebean’s germ and activates enzymes, which produces the uniqueflavor.After fermentation, the beans are dried, bagged, and shippedto the processor. The processor cleans, blends, and roasts the beans.
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After roasting, the thin shells, or hulls, of the beans are cracked andremoved. The beans are now called nibs. The nibs (meat of the bean)contain approximately 54 percent cocoa butter. The nibs are crushedand ground to release the cocoa butter. The mixture of cocoa butterand finely ground nibs is called chocolate liquor. It can be used atthis stage, stored, or further processed into baking chocolate, cocoa,milk chocolate, or sweet and semisweet chocolate. Drinking cocoa,by the way, contains 22 percent fat.
Demand SideCocoa is prized for its unique and tempting flavor, for which thereis no substitute. Around 98 percent of all cocoa goes into chocolateand chocolate-flavored foodstuffs, such as beverages, biscuits, andice cream, with most of the rest used by the cosmetics industry. Sinceits end products are luxury items, cocoa is consumed mainly inhigh-income countries, such as the United States and most European Union states, where changes in price have little impact on demand. Less mature markets that are more price-sensitive (e.g.,Japan, Russia, and much of Eastern Europe) are growing in importance.
Price DeterminantsWhile retail buying is reasonably stable, on the wholesale and futures markets, there is plenty of price activity. The cocoa market isvery susceptible to the rumor mill, partly because the remoteness ofsome production areas makes hard information on crop size difficult to come by. Producers and some governments, namely theIvory Coast, also tend to talk down output to talk up prices. In the1990s, however, the problem has been reduced by better communication systems and by industry integration (helped by liberalizationin producing countries). This has given users a rising stake in cocoagrowing and shipment, increasing their confidence over suppliesand reducing their stock requirements.The familiar factor, weather, as with most crops, impacts price.Cocoa trees require a lot of rain. If it doesn’t come, production is reduced. Too much rain brings crop diseases. A severe “harmattan” (adry, dusty wind from the Sahara Desert) can severely damage theIvory Coast crop.
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Income and population help determine price as well. Increasedwealth in a nation almost always leads to increased consumptiondemand.At the same time, thanks to deregulation, governments today have much less influence over supplies and prices than theyonce had, and the ICCO’s once strong market-regulatory powershave also gone. Today the ICCO-administered International CocoaAgreement (to which most trading states, except Indonesia and theUnited States, belong) permits only the voluntary management ofproduction to support prices. As with coffee and its voluntary regulatory body, output targets are invariably ignored. The trade paysno heed to the ICCO’s management scheme, knowing that the ICCOmay be abolished by October 2001 anyway.Cocoa butter substitutes are other vegetable fats, which are being increasingly used in chocolate. Producers fear these substituteswill displace substantial volumes of cocoa. Industry, however, contends that they may encourage demand by allowing product innovation and improving storage properties.Sugar is the other major ingredient in chocolate. One would expect the price of sugar to impact the price of cocoa. It doesn’t, mainly because sugar candy is the major competitor of chocolate. Whensugar candy prices go up, so does the price of chocolate candy, andvice versa.Other price determinants include:Transportation. Moving unprocessed beans out of the tropicsis critical. Any disruption or threat of disruption runs pricesup.Strength of the dollar. A strong U.S. dollar tends to decrease theworld price of cocoa.Inventory levels. The three-tiered inventory situation keeps asubstantial supply of cocoa in the market. This is the majorstabilizing factor in the market.
SeasonalityBecause of the long growing season and complex inventory system,there is very little seasonality. Most often the lows occur in the firstquarter. Highs come in July and August. This is reflective of themain crop harvest, which takes place October through March.
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Trader’s NotesThis is a tough market to figure out for both the fundamentalist andthe technical trader. The fundamentalist must rely on notoriouslyunreliable data. The technician must deal with relatively wide bidask spreads, high margins, and price movements that represent $10per point. All in all, it is a fast-moving market that can easily whipsaw even the most experienced trader. Whenever possible, tradewith a broker who has a substantial amount of experience.
OVERVIEW OF THE ORANGE JUICE MARKET
Oranges are grown in a variety of countries throughout the world,with Brazil and the United States being the leading producers. Mexico, Spain, China, and Italy are among the other leading producers.The United States was long the dominant producer and exporter oforanges and orange juice, but has been overtaken by Brazil in recentyears. Brazil’s estimated orange production in the 1997–1998 marketing year was about 19 million metric tons, or 31 percent of theworld’s production. That compared with about 13 million metrictons, or 21percent, produced by the United States. During the period from 1970 –1971 to 1978–1979, the United States produced nearly 28 percent of the world’s oranges, while Brazil’s share was about22 percent, according to figures from the USDA’s Foreign Agriculture Statistics Services. The United States for the past several yearshas imported more orange juice than it exported, the amount depending on weather and production. Most of the imports come fromBrazil.Florida, with oranges under cultivation since the 1500s, is theleading U.S. producer, growing more than 70 percent of the U.S.crop. California, whose trees were planted about 1700, is the secondlargest U.S. producer, and Texas is third. Arizona also produces oranges.Orange juice became a popular year-round breakfast drinkwith the development in 1947 of a process that freezes the juice without loss of flavor. The process overconcentrates the juice into a thicksyrup and then adds more fresh orange juice and other flavoringsprior to freezing. Thus, we have frozen concentrated orange juice(FCOJ).
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Sugar is one of the key ingredients of FCOJ. Fruit buyers areconcerned about “pounds solids” when they buy oranges for FCOJ.This refers to the amount of solids dissolved in the juice, sugar being the primary one. The orange crop becomes sweeter the longer itgrows. Valencia oranges make the best juice because they have ahigh concentration of solids and the variety matures late.
Supply SideWeather and disease are keys to production. Most of the early andmid-season U.S. crop is harvested in late January. The harvest period for late oranges ranges from mid-April to June. The early andmid-season crops are very vulnerable to frost. This can make forsome very exciting roller-coaster rides on the price charts. Duringthe first four crop years of the 1980s, Florida was hit with four early frosts in a row. Frost can be very damaging to the orange trees, aswell as the fruit. Therefore, serious frost damage can impact futureyears.Florida is the major U.S. producer of oranges for both eatingand freezing. Because of the frost in the early 1980s, Florida’s ability to be a reliable supplier was brought into question. Brazil’s increased production could offset U.S. losses. The problem wouldcome when both of the major producers experience reduced cropsbecause of weather or disease.Brazil’s crop has increased significantly in the past few yearsas the government began providing its growers incentives and subsidies. São Paulo is Brazil’s largest producer, with about 225 milliontrees (197.5 million bearing trees and 27.4 million nonbearing), butcitrus canker has become a serious concern for growers in the SãoPaulo commercial citrus area, according to the USDA. Fundecitrus,the São Paulo State Fund for the Defense of Citriculure, has beentaking an active role in the detection and eradication of citruscanker. Still, the USDA says several million trees could be eradicated in the next few years in an effort to control the disease.
Demand SideMost commodities are affected by supply and demand, but this isnot necessarily true with FCOJ. With orange juice, the supply side
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dominates the price equation. Historically, oranges were shippedfresh and squeezed into juice in the home or peeled and eaten. Theywere a seasonal treat. When they were not available, the consumerdid without. Now FCOJ is always available in the freezer case. If itgets too expensive, the consumer may choose to do without orswitch to a less expensive fruit, juice, or drink. In other words, thedemand is elastic. It will respond to changes in price. If the pricemoves up sharply, demand decreases. A plentiful supply and lower prices will spark demand.Besides using oranges for juice and eating fruit, oranges havesome other uses. The peel can be candied, dried, or made into marmalade. An oil, pectin, can be squeezed from the peel. It is used asa flavoring or as a scent in perfumes. The pulp left over after commercial squeezings can be fed to livestock.
SeasonalityLike most crops, the price in the cash and futures markets tends topeak prior to harvest and decline afterward. For FCOJ, the highs traditionally come in November and the lows in June.
Price DeterminantsWeather has a greater impact on the supply of oranges than on justabout any other commodity. Winter freezes, from late November tomid-February, can wipe out the Florida crop and the trees. BecauseBrazil is in the Southern Hemisphere, winter occurs there duringJune, July, and August. Orange groves require warmth and moisture. A shortage of water during blooming can be devastating, andtoo much rain or irrigation can hurt as well. In addition, insects taketheir toll. Sudden heat waves can cause young fruit to prematurelydrop. Even strong winds will hurt yields. Disease such as citruscanker and citrus chlorosis variegated can also destroy trees. This isa difficult crop to grow.Because orange juice production is a supply-driven market,worldwide competition is a major factor. After Brazilian productionovertook that of the United States during the past few years, Brazilian oranges are even being imported by Brazilian interests who operate processing plants in Florida. They process the Brazilian oranges and mix the juice with Florida juice. Analysts must track the
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total available crop and the number of newly producing trees coming into production. For reference, it takes about 5 years from thetime an orange tree is planted until it begins to bear fruit.FCOJ can be stored indefinitely, so inventory levels must bewatched carefully. These inventories are held on several levels—theconcentrate processors, brokers, warehousers, and major grocerychains.The market for FCOJ has primarily been in the United States,but has been spreading to other developed countries, which can increase consumption and prices.The ever-changing taste of consumers will also affect price. Recently, the amount of chilled, as opposed to frozen concentrate, juicehas been steadily increasing. This trend requires watching.
Trader’s NotesTrading frozen orange juice is a lot like trading pork bellies. It is fortraders who like to skydive on weekends. Sudden and significantprice changes occur unexpectedly. You should be firm of heart anddeep of pocket when trading this market.OVERVIEW OF THE COTTON MARKET
Cotton is an ancient crop first cultivated in China over 5,000 yearsago. It worked its way west via Persia and India over routes traveled by Alexander the Great. The first weaving techniques were introduced into Spain in the thirteenth century. From Spain, the science of making cotton spread to the Netherlands and to England,where it flourished in the seventeenth century. The first cotton millin North America was established in Rhode Island in 1790.It was good old Yankee ingenuity that really gave the industrya boost. In 1793, Eli Whitney invented the cotton gin. This machinealone increased productivity 50-fold. The gin removed seed fromthe fiber, so it could be woven into cloth. For the first time, enoughfiber was available to supply a commercial textile industry.
Supply SideOn the supply side of the supply-demand equation (refer to the cornoverview) are 75 countries growing cotton—about 85 million bales
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a year the past few years. Most use all their production internally.The dominant producers are China, the United States, India, Pakistan, and the Commonwealth of Independent States (the formerSoviet Union). Turkey and Egypt are also major suppliers of rawcotton.There are many different varieties of cotton, but the one that istraded internationally is called upland. Upland cotton is evaluatedusing three characteristics: grade, staple, and micronaire.Grade is based on several factors, such as color, foreign matter,and preparation. Color refers to the whiteness or brilliance of theraw fiber. Low-grade cotton has a spotty color. Foreign matter is theamount of dirt, bark, leaf particles, and other impurities that combine with the cotton during harvesting. Preparation means theroughness and uniformity of the cotton fiber.The second characteristic used to evaluate cotton is the lengthof the staple or fiber. Short staple cotton is below ¹³⁄₁₆ of an inch;medium to long is from ¹³⁄₁₆ of an inch to 1³⁄₃₂ inches; long is from1¹⁄₈ to 1⁵⁄₁₆ inches; and extra-long staple is above 1³⁄₈ inches. Uplandcotton has medium to medium-long staples.The last characteristic is called mike, which is short for micronaire. A scientific instrument measures the airflow through cotton todetermine the “mike” rating. Immature and overly mature cottonshave lower values than “perfectly” mature cotton.Cotton requires a 180-day, frost-free growing season. Hotweather with evenly spaced rains is preferred. In recent years, irrigation has been substituted for natural rainfall.Of the cotton grown in the United States, 14 states produce 98percent, with Texas the leading grower and California second. Theother major producing states are Alabama, Arkansas, Arizona,Georgia, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, and Tennessee.
Demand SideThe predominant use of cotton grown in the United States is in themanufacture of clothes. The remainder is used for household orindustrial uses. This division allows for a fairly stable demandpattern.Synthetic materials, with their low cost and resilience, becamevery popular and had a significant impact on cotton demand for
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many years. But the cotton industry fought back and recapturedmuch of the market share it lost to products made of rayon and polyester. In 1968, cotton had a 49 percent share of the total apparel market in the United States. By 1982, this had slipped to a low of 35 percent. Aggressive marketing and promotion campaigns by the