Sugar with your Coffee? Fundamentals, Financials, and Softs Price Uncertainty

Abstract

We investigate empirically the main factors related to coffee and sugar (“softs”) price uncertainty. We link physical market fundamentals as well as financial variables to (i) market expectations of future price volatility and (ii) the extent to which these two commodities both co‐move with equities. The physical market fundamentals that matter include the state of inventories, weather, and disease outbreaks. Beyond these fundamental factors, our results highlight the crucial role of financial market sentiment in understanding cross market linkages and the magnitude of softs market uncertainty. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark 37:744–765, 2017

Sugar Futures as an Investment Alternative During Market Turmoil: Case Study of 2008 and 2020 Market Drop

“…Another reason why sugar underperformed upon the outbreak of the coronavirus crisis poses the fact that the outbreak of diseases harms sugar production and hence the price dynamics are substantially affected. In this regard, Covindassamy et al ( 2017 ) show that price dynamics of sugar are not just determined by its correlation or co-movement with other asset classes but are also subject to change based on physical market fundamentals. The output of soft commodities is influenced by planting decisions, disease epidemics and weather conditions such as temperature and rain.…”

“…Extreme temperatures and scarcity of water as well as the outbreak of diseases deteriorate the sugar market overall. On the financial side, Covindassamy et al ( 2017 ) show that the co-movement between equity and commodity markets depends on the overall market sentiment within equity markets as well as the intensity of financial speculation in commodity futures market.…”

“…This can be justified by the fact that commodity prices are also subject to change based on market fundamentals. These physical market fundamentals, including inventories, weather events and diseases, matter (Covindassamy et al 2017 ). During the financial crisis in 2008 when stocks fell, agricultural commodities offered a short-term alternative.…”

“…Particularly, sugar was able to provide a good remedy for suffering equity portfolios, since it started a bullish trend in November 2007 which came to an end in January 2011, which was much later when compared to the other food staples (Covindassamy et al 2017 ). This bullish trend in sugar was supported by the monetary policy enforced by the USA between 2005 and 2010; however, this effect vanished after 2011 (Fam et al 2017 ).…”

Volatility term structures in commodity markets

“…Prokopczuk, Stancu, and Symeonidis (2019) and Kang, Nikitopoulos, and Prokopczuk (2019) analyze economic drivers of commodity market volatility and crude oil volatility and find that volatility shows strong comovement with economic and financial uncertainty, especially during crisis periods. For the softs and the agricultural market Covindassamy, Robe, and Wallen (2017) and Adjemian, Bruno, Robe, and Wallen (2018) show that macroeconomic variables and commodity-specific variables matter for the volatility.…”