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  • 7/29/2019 ICE Monthly Softs Fast Facts


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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

    Sign Up for a Two Week Free Trial to Weekly Reports

    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


    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


    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


    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.









    80/81 85/86 90/91 95/96 00/01 05/06 10/11


    Ivory Coast Ghana
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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


    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
  • 7/29/2019 ICE Monthly Softs Fast Facts


  • 7/29/2019 ICE Monthly Softs Fast Facts


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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



    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









    93/94 96/97 99/00 02/03 05/06 08/09 11/12


    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:



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

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

    Index Contracts

    Date Electronic


    Open Outcry


    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. 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.


    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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    About J Ganes Consulting

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