The Softs Review for December 6th, 2010

It is becoming more and more obvious that I can no longer look at the cotton market (or any of the Soft markets for that matter) in the same way I used to. I feel that the way things are going all it takes is two consecutive days in one direction to signal that the tide has changed and when it changes the tsunami begins and the tide overwhelms. I believe that we are in the midst of a huge shift in the financial world, which stems from the ongoing breakdown of traditional currencies. The dollar still gets used as a safe haven during times of economic uncertainty and fear, but that confidence is being challenged. Currencies have been used to determine value but new problems are arising destroying those traditional relationships. In other words the full impact of the Fed’s QE2 move has yet to be felt in my opinion.

The value of commodities in relation to one another is another method of pricing. Pricing cotton in terms of other commodities like gold, silver, copper, crude oil or even soybeans, wheat and corn, and you get a whole different perspective on things. Yes, cotton prices are at record highs, but not as much so when compared to relative value in terms of relationship with other commodities. The soft complex may have been simply been playing catch up with them. In other words, while cotton prices have more or less doubled, the market has also seen “silver go up four-fold, gold three-fold, copper and crude oil more than two-fold, and corn, soybeans and wheat double in price.” I suspect this trend will continue as more money makes its way into commodities.

What to expect this week? I expect cocoa to continue to and try to advance, especially as long as tensions in Ivory Coast remain, as that situation prevents the normal flow of cocoa exports. But even independent of that Cocoa seems undervalued when compared to other softs like sugar. Cotton crop report will likely make the market nervous, but I expect the strong physical market to continue to show up in export demand. The bigger news may soon start to focus on shipping all those exports. Logistics are starting to have a play as can we ship the quantities in timely fashion? Either way the key will be the cash market. Importers are scrambling to lock up remaining supplies before they run out altogether, which is underpinning prices.

All this makes me nervous about being short, but I opened this column with “two consecutive days in one direction to signal that the tide has changed.”


Softs Review for Nov 29, 2010

This is a time of year when traders might best be apt to look to a winding down of the year’s activity and for prices to consolidate. And while this may prove true for some markets, with fund managers no longer actively chasing values, the macro picture still seems to have the attention of investors this past month. This has been especially true with the dollar moving up contrary to calls for its demise due to Fed action and the QE2. So with that in mind look for the soft markets to remain on the defensive, but be aware that price spikes are still possible.

Cotton is still very much in demand, but prices have been all over the place this past month. I think between now and year’s end we’ll learn what value to place on it. As the year comes to an end Coffee has typically shown a strong seasonal tendency to move higher during this next month, which can be seen on this chart. I still tend to favor coffee from the long side, just know that sharp and swift moves can knock you out of positions. Sugar is the one market most apt to consolidate, but in a fairly wide range, the key will be if the range between 25.5 or 30 cents gets broken. As for cocoa, I still feel there is merit to the 2750-2950 range continuing.