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WHATS AHEAD?Weather & Politics: Too Much of a Good Thing Gone Bad!Seasonal Swings and Spreads: Focus is on 2012-13 but What ComesNext?

Crop Reports & Other Indicators: USDA Makes Subtle Changes toCottonMore Revisions are Necessary

Fundamental Favorites: Bear Market Rallies

ICE Update: Holiday Schedule, Record Volumes and Cotton Limits

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SOFTS: Fast FactsJune 2012

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Weather & PoliticsToo Much of a Good Thing Gone

Bad?This is a critical time of year for having

adequate amounts of rainfall to sustain

crops, but too much moisture could slow

harvests while too little rain could retard their

development. Currently the Pacific Ocean

temperatures are in a transition phase with a

possible El Nio beginning later this year that

is already starting to have some influence

over rainfall levels in key countries around the

world. Brazil is receiving too much moisture in

some areas and now the Indian monsoonal

rains are having a delayed start. If theseconditions persist, the outlook for crops, such

as sugar, cotton and grains could take a turn

for the worse dashing hopes of a promising

start that would have led to an improvement

in production 2012-13.

El Nio and La Nia are typically defined as

sustained sea surface temperature

anomalies (positive and negative

respectively) greater than 0.5C across the

central tropical Pacific Ocean. Clearly the

warming in the eastern equatorial Pacific

and Pre-El Nio conditions can create a stir inthe markets with traders already trying to

draw parallels to the last significant El Nio

event in 2009. There are differences though

which meteorologists are noting especially

with the stratospheric winds that could keep

this years potential El Nio from being too

harsh if it even fully develops. In 2009 for

instance, rain lingered over the important

center/south sugar region of Brazil and

slowed the harvest, created port loading

delays and reduced the sugar content of the

cane. The rains were not expected to persistas they did and farmers kept hoping for some

relief but this came too late to matter for that

years harvest and also negat ively impacted

the cane for the following season as well.

Last month the rains started in Brazil and

raised some alarm, but the situation quieted

as it temporarily turned dry again for a few

days and then the rains returned and

potential could continue into the latter half

of this month, creating some problems for

sugarcane producers.

The conditions in China and India are

somewhat worrying for the opposite reason-too little rain, but this is already starting to shift

in China with some easing in the dry

conditions. Some of the areas most

impacted by the lack of rainfall were

predominantly irrigated so concerns were

also lessened. For the West African cocoa

regions, dryness is also a concern and

currently about 30% of Ghanas crop area

has received below normal rainfall, but not

to such an extent that it is causing damage

to the crops, but certainly if the situation

persists or worsens, there could be an issue

for next seasons main crop. The weather in

the Ivory Coast needs to be monitored

carefully as well for similar reasons although

Ghana has been drier than their neighboring

country. The market has had mixed signals

from the weather because it has not been

persistently dry and to an extreme degree.

This makes it harder to draw conclusions

about the impact the dry spells have had, if

any. It is this type of on-again off-again worry

that makes the cocoa market notorious for

erratic trading action at this time of year and

headed to July before quieting down beforethe onset of the new crop arrivals.

El Nio episodes bring some good as wellit

greatly reduces the number of hurricanes,

which will lessens the odds of damage to the

Florida citrus crop but also hurricane

damage to the US sugarcane and cotton

crops in the southeast and potential for

heavy tropical storms or hurricanes to sit over

the coffee areas of Central America/Mexico

which tend to dump vast quantities of

rainfall.

The forecasts calling for El Nio conditions to

develop later this year could cause

temperatures next winter and spring to be

above normal in many areas.

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W African Crop Outlook Improving

Source: ICCO

As variable and uncertain the weather can

be it seems the global economic situation

remains even more turbulent and potentially

treacherous for the markets. There are

intervals of respite from the intense problems

that are building in some countries with the

situation spreading to other regions beyond

the current hot spots which seem to be

becoming more and more numerous. World

leaders and other organizations have not

been able to fully come to terms with the

gravity of the situation at hand or mobilize to

do anything effective at stabilizing the worldeconomy that continues to hang in the brink

of possible chaos with some countries

already dangerously close to the edge of a

cliff.

Bank runs and bailouts are occurring but the

money flows out are happening at an

accelerated pace in Greece and Spain and

could happen elsewhere as confidence is

shaken with Italy seeming to be the next on

the hit list. Europe has fallen into recession

already from trying to bailout banks in

Greece, Portugal, Ireland and now Spain.

The possibility that Greece may still need to

abandon the euro is a testament to how

ineffectual policy has been so far at trying to

stymie the situation. It cant be ignored that

the United States may also be facing a day

of reckoning early in 2013 if Congress cant

find a remedy for this countrys fiscal

ailments.

Prior solutions to overcome domestic

problems were to expand manufacturing

and agriculture for export to bring in foreigncurrency and boost trade. This model

worked when there was a ready market for

increased goods. A broadened middle

class and greater disposable income in

emerging nations helped to fuel this, but now

with the slowed growth in many countries

that were looked to for future earnings, this is

no longer as viable an alternative. China,

India and Brazil were the top three front

runners but also Japan, South Korea and

Russia are all showing signs of slowed

economic expansion.

The other region that has been a large

importer of goods is the mid-east but the

events of the past year and push towards

democracy has not been an easy one with

more violence and uprisings continuing and

Egypt remaining in a state of flux. To a

certain degree it is reminiscent of the break-

up of the Soviet Union and domino effect

from the fall of communism that led to the

tearing down of the Berlin Wall and division in

former Soviet States as well as in the Baltics.

Uncertainty in timing and volume ofpurchases in the same manner as before is at

risk due to security and possible worries

about credit and the ability to get financing.

All this has created unease in the markets

and typically this would keep commodity

prices under pressure. The only time the

markets seem to rally is when there is a short

term infusion of hope that the corner has

been turned and the situation may improve

or at the very least the worst of the news is

already built into current market

expectationsat least until the next piece of

bearish economic data or financial calamity

arises that again reminds traders that the

worlds problems are likely to take a long

time to resolve and it wont happen

overnight, in days, weeks or even months

from now.

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Seasonal Swings

and SpreadsFocus is on 2012-13 but what

Comes Next?

With Spring plantings now virtually completed

and trees already blossomed and on their

way to developing the 2012-13 crops, the

market attention will be first focused on the

yield potential and harvesting activity but

also on early indications for the following

season. This is easier to predict when markets

had been at extreme levels that would have

an influence on future planting decisions andfor tree crops the amount of investment

farmers made in maintaining and caring for

their plantations already. The impact of this

would tend to be cumulative assuming

normal weather even if prices had dropped

or appreciated considerably over the course

of the current season. With the markets

having peaked last year but still at

reasonably attractive levels for most farmers,

this should lead to ongoing investment and

best care practices. Of course, production

will ultimately be dictated by the weather

but on first blush it would seem thatproduction should still be heading higher for

cocoa and sugar while cotton remains more

of a question mark.

There is a common pitfall--production cant

be viewed in a vacuum and must be

considered against expectations for

demand. Oftentimes traders make an error

in their view by believing that record crops

bring on low prices and that small crops are

guarantees of higher prices. This is far from

reality as it depends whether demand is

sufficient or not to absorb or cover the

change in supply. An early indicator of how

traders perceive future supply and demand

(whether right or wrong) is through spreads.

A normal carrying charge market would

suggest that there is little worry about future

supply but also that nearby needs are being

satisfied. An inverted market structure would

be indicative that while nearby needs are

limited, future supplies will be sufficient to

cover expected demand. A rally is simply

indicating that higher prices are necessary to

assure that future needs are being satisfied.

While there is sometimes liquidity issues in

deferred contract months that could skew

short term trading, the spreads, more so than

the outright price, reflect the markets longer

term views.

Just as the outright price sometimes has a

distinct seasonal pattern up or down where

year after at around the same time the

market is either pressured or lifted generally

by hedge related activity, the spreads

between contract months can also reflect

these cyclical variations with known periods

during any given year when the spread

between the delivery months widens or

contracts. This is generally easier to identify

when there is a distinct new crop and old

crop, such as in cotton or when production

dominates in one country or state where that

supply can be threatened by a single

weather event such as a frost in Brazil for

coffee or a freeze or hurricane in Florida that

could immediately reduce the supply of

oranges.

For cotton on a spread basis, there are

generally two popular times of year to

engage in trading that are notorious for

yielding positive results year after year. In

March prior to the Planting Intentions Report

when farmers are still determining which crop

should go in the ground, December has a

tendency to rise to encourage sufficient

plantings as this is the first new crop cotton

contract with October too early in the new

season to fully reflect the harvest and supply

indications. New crop July on the other hand

is generally pressured in an effort to assure

that demand is strong enough to absorb the

next crop. Late in the year it becomes moreadvantageous to buy July and sell March in

the belief that July will rise during the spring if

there is a weather event delaying plantings

and new crop or Red March would fall to

attract demand.

For the juice market the obvious play is to

buy the nearby contract around

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troubles in southern Europe continue to

trigger problems elsewhere, with

expectations that Italy is the next country to

feel the impact from overburdened debt.

Despite all the worries, the USDA is expecting

mill demand to rebound by three million

bales in anticipation of the situation

improving and low prices encouraging some

restock building perhaps. Even with the

increase in demand, world stocks are

expected to rise by more than seven million

bales and push up global inventories to new

record highs. This is the overriding bearish

fundamental feature for the market and

could keep a lid on interim rallies. The worst

scenario would be for the market to rally too

much on hopes of China continuing to buy

cotton and then find that China instead isreleasing cotton from their strategic reserves.

Cotton Remains a Bear Market with Continued

Over Supply in 2012-13

Source: USDA

The cotton market is in a delicate spot

because if it rallies to sharply in exuberanceover Chinas purchases, it could shut

demand off for other more price sensitive

purchasers. The market will need further

reinforcement that China is back in the

game rather than this being a one dose

adrenaline shot to sustain any rise assuming

normal growing conditions. China has some

pockets of dry weather but nothing that is

too alarming at this time. Texas could use

more rain, but the situation is vastly improved

from last year when the crop was failing. I

would be more inclined to sell rallies still then

hope for a sustainable recovery until there is

further supportive news to justify more of an

advance.

Fundamental

Favorite:Bear Market Rallies

Picking bottoms is tougher than it would

seem. Markets overshoot the downside just

as they do the upside with the caveat ofcourse being that markets cant go to zero,

but they can get awfully close. In my nearly

30 years covering the Softs Complex I have

seen each of the markets sink to rock bottom

levels where there was absolute hardship for

producers and it made no economic sense

to grow the commodity but in fact,

production of course continued, albeit at a

slowed pace. Spot January sugar one year

even plummeted to a brief low of .01 or a

contract value of only $11.20! For tree crops

it takes longer for production to respond to

depressed values than it does for field cropsthat are replanted each year and the

markets can languish for extended periods at

rather depressed values. Markets never hold

at peak prices for any length of time, but can

sit for what seems like an eternity build a

base to rally from. The lesson on this is that

patience is usually rewarded then to

continue to bottom pick at seemingly

arbitrary levels simply because the market

seems cheap. It can get and often does get

cheaper still. There does come a point

where perhaps all the bearish news wouldseem to be discounted by the market and

therefore should be little selling left. In

addition, there certainly are times when from

a risk to reward perspective there would

seem to be marginal downside risk

compared to upside potential, especially for

those markets that are prone to weather

spikes.

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millionsofbales.

output use

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However, jumping the gun prematurely can

be frustrating and bring disappointing

performance or trading results. Its that itchy

trigger finger that needs to be avoided and

looking for reasons for the markets to rally

ahead of their time without letting the bear

market completely run its course.

Given the economic upheaval that is

nowhere close to being resolved, the

question I ask myself repeatedly is what does

this mean for demand and then also credit?

Can buyers comfortably restock inventory

when they still may be concerned about

obtaining financing? The worries that

proverbial other shoe may drop even before

year end are very real and this makes me

hesitant to turn bullish on the markets just yet.

The demand driver is not there and

production is still in expansion mode and

hasnt started to contract in reflection of

declining prices. Stocks are still building.

This by no means suggests that bear market

rallies are not possible. They certainly are

and present excellent trading opportunities.

Markets can be oversold on a temporary

basis and bounce from this point, but this

doesnt mean once the correction is over the

market wont resume the decline and sag

back down again. Where I see bottom

pickers being most prevalent are in cotton,

coffee and sugar, but have a difficult time

justifying the rationale for this on a

fundamental basis. Should weather events

push the markets up or rallies occur on

broader economic news, I would still be

inclined to sell into the rise and not expect

the counter trend rally to be long lasting or

sustainable just yet.

ICE Update:

2012 U.S. INDEPENDENCE DAY HOLIDAY

TRADING SCHEDULE

For Sugar No. 11, Coffee C , Cotton No.

2, Cocoa, FCOJ, CCI Index and RJ/CRB

Index Contracts

Date Electronic

Trading

Open Outcry

Trading

Tue, Jul 3 Regular hours Regular Hours

Wed, Jul 4 Closed Closed

Thu, Jul 5 Regular Hours Regular Hours

ICE Futures U.S. Independence Day Holiday

Trading Schedulefor all IFUS products

ICE FUTURES U.S. DAILY VOLUME RECORD

ICE Futures U.S. set a daily volume record of

851,852 contracts on June 12, with 801,304

futures contracts and 50,548 futures options

traded. The exchange's previous daily

volume record of 840,591 contracts was set

on September 16, 2008.

COTTON PRICE LIMIT RULE

The movement of cotton futures prices has

triggered the ICE Futures US cotton limit price

rule a number of times in the past months. Asa reminder, the ICE Futures U.S. price limit rule

provides for an initial limit amount that

increases or decreases as the absolute price

level of the determining futures delivery

month increases or decreases. In addition,

the rule provides for a single expansion of the

initial limit amount by an additional 1.00

ct/lb. on the trading day following any day

on which two or more of the first five listed

months (or the sole remaining futures

contract in a crop yeari.e.,July) close at

limit bid or offer based upon the initial limit

amount then in effect.

The complete cotton price limit rule is found

inICE Futures U.S. Rule 10.09.

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