The Softs Pit Review
For the week of November 16th, 2009
By PitGuru Jurgens H. Bauer
Now that the popular principle month December options in coffee and cotton have expired, one can look for a renewed sense of reality in those markets (you don't think that prices get influenced at expiration, do you?). December cocoa options expired last week and the December sugar options go off the board early this week. When I say a renewed sense of reality, what I mean is that these markets ought to better focus in on their own fundamentals rather than be subjected to outside forces and the whims of large option holders.
Calling for increased production levels in Brazil and India, the International Sugar Organization (ISO) revised their forecast for a smaller global sugar deficit, but a deficit remains (7.2 million tons in 2009/10 vs. deficit of 11.3 million tons in 2008/09).4 The ISO had originally been calling for a deficit of 8.4 million tons in September. There are a growing number of analysts that believe that sugar is poised for a major price change in the coming weeks. Most of these tend to believe this move will occur on the upside. I don't disagree, and have advised owning the H 25/30 call spreads in anticipation of such a move. I continue to seek long positions. There has been a drain in volatility among the options, so perhaps additional opportunities may avail themselves to attractively acquire long call positions. December options expiration takes place on Monday.
Cotton prices had a busy, volatile week yet prices basically ended about where they started. Both ends of the range between 69 and 66 in December were tested. And while from a technical standpoint Thursday's volume reversal to the downside might have been uglier had it not held 66, I am encouraged enough by the continued increase in open interest that I no longer feel bearish and instead wish to participate on the long side. Therefore, I did recommend liquidating the spread, which of course widened further on Friday. It may still, but with FND swiftly approaching, that spread is far too risky so my focus is better made elsewhere. That market participation has grown shows just how strongly that specs and index funds are involved, although I am concerned about the reduction in the number of hedgers. We have the smallest US crop in 20 years at just 12.5 million bales, and while that can be a good thing for bulls, remember it also can mean a quick trip south should specs decide they want out; so rather than buy futures, this is a market which screams for the limited risk provided by long option strategies. Remember what happened a year ago in March! I favor this market and subscribers should anticipate a recommendation this week.
Coffee prices dropped significantly during the past week, yet I remain a friend of the long side. The violent move down caused some long liquidation, but also inspired some roaster buying. Now that Dec options are out of the way, I believe there is potential to see a clearer picture of what lies ahead. I do favor the long side of this market and continue to own call spreads, which I recommended adding to on Friday's close.
I've been a skeptic towards cocoa's high prices for a while now. Once the December contract is gone, I'll see if 3000 or 3300 gets taken out in March. For now, I am standing aside, yet am apt to follow a move below 3050 by getting short via puts.
Orange juice futures has been quiet. As much as this is a market that frequently enjoys a weather play later on, typically prices experience some softness as year end approaches. With the weather so warm this past week in the North East, specs certainly don't have freeze on their minds. Look for buying opportunities to materialize.
4 http://in.reuters.com/article/businessNews/idINIndia-43933420091113
Past performance is not indicative of future results.
***chart courtesy Gecko Software
