London, Feb. 15 - London coffee, cocoa and sugar futures rallied on Friday to multi-year peaks as investment funds and speculators shifted money into soft commodities in search of stellar returns.
Soft commodities have seen waves of support from funds looking for fresh investment avenues, with agricultural commodities tipped as a good bet for 2008.
Coffee, cocoa and raw sugar futures have soared by more than 20 percent since the start of this year, powered by heavy investment fund buying as stock markets have lagged.
ICE arabica futures are up 23 percent, cocoa 27 percent and raw sugar futures 24 percent so far this year. In contrast, the MSCI main world equity index fell 8.26 percent in January.
"It is the season for soft commodities," said Nestor Osorio, Executive Director of the London-based International Coffee Organization (ICO).
"I'm very surprised to see how pronounced the trend is at the moment," he told Reuters.
Robusta coffee futures jumped over 3 percent on Friday morning to a 10-and-a-half-year peak of $2,450 per tonne, and arabica coffee climbed to a 10-year high at $1.6015 per lb.
Cocoa futures shot up to a 24-year high at $2,585 a tonne, and raw sugar soared to an 18-month high at 13.73 cents a lb. White sugar futures hit a 15-month peak of $379.90 per tonne.
A senior fund manager, echoing the views of several traders and analysts, said funds were shifting money into soft commodities as a hedge against poorly performing stock markets.
"Soft commodities in the month of January showed non-correlation with equity markets and I think that's what is driving investment demand," said Kimberly Tara, managing director of FourWinds Capital Management.
Investors see strong returns from food commodities due to rising demand and tight supplies, driven largely by fast-growing incomes and populations in emerging economies such as China and India.
The increasing use of agricultural commodities, such as wheat and sugar, as a feedstock for biofuels is also contributing to the price frenzy. Sugarcane, for example, feeds surging demand for new flex fuel vehicles in Brazil. Soaring oil prices force consumers to seek cheaper, alternative green fuels.
Industry leaders and analysts predicted soft commodity prices would stay strong this year, but warned the supply/demand picture did not justify the scope of the present rally and said prices should adjust back in line with market fundamentals.
"Coffee prices will remain strong for the rest of this year," Osorio said.
He said the increasing involvement of funds in soft commodities would likely trigger more volatility with risks of 10-15 percent price falls as funds and speculators take profits.
Whereas fundamentals in coffee were tight due to low stocks and rising demand, and a modest global deficit was seen in cocoa, the opposite scenario applied to the sugar market where prices are rising despite a huge global glut of the sweetener.
"I would not be surprised if the growth in sugar prices triggers additional supply," said Sergey Gudoshnikov, a senior economist of the International Sugar Organization (ISO).