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Agriculture sector rally led by coffee, corn and cattle
Commodities 5 minutes to read
Ole Hansen
Head of Commodity Strategy
Key points
- The agriculture sector is off to a strong start this January, with tight supply driving arabica coffee and cattle futures to fresh record highs, while corn trades near a 15-month high
- Ongoing momentum attracting a great deal of speculative buying, not least in corn which has seen the hedge fund long rise to a May 2022 high
- Cotton potentially ripe for a short-covering bounce after spending the past six months consolidating following a major slump during the first half of 2024
The agriculture sector is off to a strong start this January, with tight supply driving arabica coffee prices to fresh record highs. Corn's near non-stop rally since last October has seen it reach a 15-month high amid tightening US and global supplies. Overall, the Bloomberg Agriculture Total Return Index, which holds 75.3% of its exposure in six grains and oilseeds and 24.7% in three softs, is up 4.4% this month after managing a modest 3.4% gain last year.
In addition to these gains, the livestock sector is trading sharply higher amid record high futures prices for beef in Chicago. This is driven by tight supply due to a dwindling herd, a very cold January delaying the fattening process, and import restrictions on beef from Mexico amid disease controls.
Conversely, cotton has spent the past six months consolidating following a major slump during the first half of 2024. While the fundamental outlook remains challenging, it is worth noting that prices have stopped falling despite a near-record short position held by speculators.
Below table, shows managed money positions across the four agriculture commodities mentioned in this update. This data is published weekly by the US CFTC in their Commitment of Traders reports, and in our regular updates we watch positions and changes made by this group of traders as they tend to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
Corn supported by export and ethanol demand, and lower 2024 production
Corn prices have rallied strongly over the past five months. Last week, the March futures contract traded in Chicago hit a 15-month high at USD 4.94 per bushel, marking a 37% rally from the August low. This ongoing rally, without major corrections, has seen continued buying from momentum-chasing hedge funds. This culminated in the week ending January 21, when the net long position hit a May 2022 high of 312,000 contracts.
The primary factors contributing to the rally have been tightening US and global supplies. The recent acceleration occurred after the US Department of Agriculture reduced US harvest estimates and the carryout, i.e., the amount of stock left in storage at the end of the current crop season, due to increased demand for ethanol and exports. In addition, the Oceanic Nino Index points to an incoming La Nina which normally brings persistant dryness to Argentina and southern Brazil, potentially worsening crop conditions, with expectations for Argentina’s corn and soybean crops already suffering a series of downgrades.
From a technical perspective, some resistance is now lurking just below USD 5 per bushel, and followed by USD 5.10 per bushel, and if rejected it may point to some consolidation and perhaps a small correction towards the bottom of the established channel.
Arabica Coffee rally supported by tariff risks and low stocks
Arabica coffee prices continue to reach fresh record highs, driven by the prospect of a lower 2025/26 crop in Brazil, the world’s top producer. This following a 2024 that saw severe drought being followed by heavy rains, the combination of which damaged Brazil’s coffee crop to the extent that Conab, Brazil’s crop agency, this week lowered its 2025/26 production outlook for Arabica to 34.7 million bags, a 12% reduction from the previous season and the lowest since 2022. Additionally, the risk of tariffs on imports to the US has helped underpin prices, with the weekend spat against Colombia, a top three producer, supporting the rise seen on Monday.
The Arabica coffee futures contract traded in New York, which primarily sources its supply from Brazil and Colombia, has reached a fresh record at USD 3.64, an 86% increase over the past year. On a total return basis, taking the positive carry (backwardation) when rolling futures contracts into account, the gain is 108% during this time. Money managers hold an elevated long which will be held as long positive momentum can be maintained.
Cotton treads water with record spec short in focus
Following a major decline during the first half of last year, cotton has since stabilised within a wide range of USD 65 to 75 cents per pound, and currently a minimum break above 70 cents per pound is needed to change the negative outlook. Notably, managed money accounts have held a net short position for a record-breaking 39 weeks. As of the week ending January 21, this position reached nearly 48.4k contracts, potentially increasing the risk of short covering on a technical break to the upside.
The weakness has been driven by a combination of weak global demand and competition from synthetic fibers. Record-high production in Brazil has created a more competitive environment for U.S. producers, compounded by the strong dollar, which has made American cotton less competitive and reduced its market share.
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