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Ag prices soar: Commodities get mojo back

Investors have been harvesting big gains in the past month from agricultural commodities, and some of the futures, such as sugar and soybeans, were near levels this week not seen in 18 months or more.

Latin America weather woes and the Brazilian government turmoil are playing a major role in the month-long ag rally. Brazil's real has strengthened against the dollar, encouraging producers of traditional export products, such as coffee and sugar, to sell supplies at home.

"You had the real, which started to appreciate in anticipation of the impeachment of President (Dilma) Rousseff," said David Maloni, chief commodity strategist at the American Restaurant Association. "You also have a lot of investment money coming in on the long side as opposed to the short side, which is bringing support to the markets."

A harvester loads a truck with sugarcane at a plantation
Carla Gottgens | Bloomberg | Getty Images
A harvester loads a truck with sugarcane at a plantation

Brazil is the world's largest producer of sugar and arabica coffee. The Intercontinental Exchange's July raw sugar jumped nearly 5 percent Wednesday to settle at 16.77 cents a pound but earlier in the session flirted with levels not seen in 18 months. Sugar is up 16 percent in the past month. Arabica July coffee futures perked up nearly 1 percent Wednesday and are up 8 percent in the last week.

In the case of sugar, part of the move to the upside is tied to Brazil's currency, although traders say there's also an impact due to trade policies in India, the world's No. 2 producer of sugar. Drought in India's cane plantation region also has kept sugar supplies tighter and now the south Asian country is set to become an importer of the sweetener. London-traded robusta coffee has been moving higher and helping arabica and there's been talk of short production of robusta coffee in Vietnam and Indonesia this year because of dryness from the El Nino weather phenomenon.

"Even though we're looking at a pretty big increase in production year over year in Brazil's arabica, the loss of robusta production is making it much more likely that we'll see exports probably hold about the same on a year-to-year basis from Brazil," said Jack Scoville, vice president and market analyst with Price Futures Group.

Elsewhere, July soybeans touched a 21-month peak Tuesday on the CBOT, reaching $10.915 a bushel when a bullish U.S. Department of Agriculture report sent the beans up 5 percent, but the futures erased some gains Wednesday in profit-taking. Still, the July soy beans remain up 15 percent in the past month and 23 percent this year. July soy bean meal futures are up 28 percent in the past month and 33 percent this year.

The USDA's World Agricultural Supply and Demand Estimates report Tuesday estimated soy bean ending inventories in the domestic 2016/17 season would be about 25 percent below trade consensus.

The May report is also the government's first estimate for the 2016/17 grain season.

"This is good news for the farmer but I would say not before bumps in the road," said Jerry Gulke, president of the Gulke Group and a farmer in Illinois.

As for corn, the July contract is up nearly 5 percent in the last month although it fell about 1 percent on Wednesday to $3.76 a bushel. The July wheat also was slightly lower Wednesday to $4.5825 a bushel, and it comes as wheat is not sharing in the grain rally so far this year. Corn has appreciated due in part to concerns around Brazil's corn crop and weakening dollar.

"All the talk that we see among farmers … is how can they rip up their corn or any late corn can they plant soybeans instead?" said Maloni. "Soy beans are going to pull corn a long way up."

Meanwhile, the July rough-rice futures contract in Chicago was up about 1 percent on Wednesday and for the past month is ahead 13 percent. The jump comes amid worries about a drought in major rice-growing regions of Southeast Asia.

Even orange juice futures are getting their mojo back despite continuing weakness in the consumer market for the juice. The July frozen concentrated orange juice futures rose nearly 2 percent Wednesday to $1.4570 a pound. Orange juice futures have added more than 5 percent in the past week, getting support from concerns about dryness in Florida.

"Longer term, there's a real chance that we'll see commodities overall start to do better," said Scoville. "There's a lot of indicators out there and a lot of feeling out there that we'll see commodities overall start work higher."

As an example, Scoville noted that the CRB index, which is made of up 19 global commodities, is starting to turn north again. The index was down 23 percent in 2015 but is up nearly 7 percent in the past month. He also cautioned that investors need to be selective with commodities.

Maloni said crude oil's rebound may be a sign "for the speculative trade to get back in commodities. I think that the spec trade is looking for a return. Commodities are historically very undervalued relative to equities. We suggest that there is a potential for greater return here."