NOTICE! Temporary Changes to Opening Times Instituted for Sugar, Coffee and Cocoa Contracts and Settlement Time for Cocoa, March 15 – 26. Please visit the ICE website for further information.
The Soft Spot
The Coffee, Cocoa, Cotton and Sugar markets have all retraced sizable portions of their bull runs. Sugar just keeps dropping like a stone, while Cotton seems to defy gravity. Let’s examine the fundamental and technical reasons behind all of this.
Coffee 03/19/2010
Life Time Trading Range 41.50 Cents - $337.50 per Pound
Trades on The ICE 2:30 AM – 1 PM CDT
Brazilian growing areas have experienced extremely dry weather recently. I’m hearing that the Coffee market will likely build weather premiums between now and the mid- crop harvest. At that time, any damage to the mid-crop will be apparent. Supply is tight and this could prompt commercial and speculative buying.
The Coffee market has priced in a Brazilian bumper crop and sharp increase in Colombian production for the 2010-11 growing season. Cash markets in Central America and Mexico were featureless this week, as only Honduras and Guatemala have a significant supply left from the 2009-10 crop. Demand for higher quality beans and furious competition for the remaining supply has kept premiums high. Honduran top quality beans were being traded between premiums of 25 cents to 27 cents per pound over May Coffee.
Technically, it appears that Coffee has turned the corner and would like to move to the upside again. This week’s market action has taken the Coffee market above the 9 bar moving average. The center band of the Bollinger study rests above at 138.22, and Parabolic resistance a bit higher at 139.77. The stochastic failed to issue a sell signal and turned up. Many times this is a stronger signal than a crossover. I like the Coffee market explore ways of getting long with realistic risk.
I cannot stress the following enough. Asian countries have taken a strong liking to Coffee. Just think, if the Chinese were to embrace Coffee as their beverage of choice, where will the supply come from. The situation in Coffee is much like the one that existed in Cocoa twenty years ago. Cocoa was $1000 per tonne at that time, now its $3000 per tonne. Need I say more?
May Coffee must close above 134.50 Friday March 19th to turn the weekly trend up.
Do not trade without protective strategies such as stops and or options.
Cocoa 03/19/2010
Life Time Trading Range $444 – $5379 per Tonne
Trades on The ICE 3 AM – 1 PM CDT
Cocoa has made a run at resistance and is dead in the water. This market action leads me to believe that Cocoa's oversold condition has been neutralized. Cocoa finished out the session on the weak side Friday. This is thought to be directly related to the strength of the U. S. dollar. If you examine the weekly chart and look at the lows of the last three weeks, you see the market attempting to get through the 50 percent Fibonacci retracement of the rally from 19.82 to 35.14. The exact price is 27.48. This is major support. Penetrating this price area could bring on further selling pressure and a possible move to the 25.50 area.
Regarding Cocoa production, there is increased supply coming online in the future. A robust Ivory Coast mid-crop and a record crop from Cameroon is going to provide it. This season’s Cameroon production is pegged at 205,000 tonnes which tops last season’s record crop. This is good news as Cocoa remains the main cash crop for more than 75 percent of Cameroon’s population. The Ghana Cocoa Board is planning to double fertilized acreage. Ghana is targeting production of one million tonnes of Cocoa beans by the 2012-13 growing season.
Cocoa demand will be picking up as the macroeconomic picture improves. We will get a read on the consumer Chocolate market soon as purchases of Chocolate for the Easter and Passover holidays are just around the corner. Commercial buying interest is quiet. All eyes are now on the West African mid-crop harvest.
Cocoa looks to be headed lower at this time.
May Cocoa must close above 29.70 Friday March 19th to turn the weekly trend up.
Do not trade without protective strategies such as stops and or options.
Cotton 03/19/2010
Life Time Trading Range $26.84 – $117.20 per Pound
Trades on The ICE 8 PM – 1:30 PM CDT (Next Day)
King Cotton looks to be making a secondary run at the contract highs. Price action is exhibiting an up flag that projects Cotton prices to 87.00. The present contract high is 84.59. This could very well occur. But many times, markets make secondary runs and sometimes even make new highs only to fall flat on their faces after doing so. Cotton is in a relatively quiet time in its growing and marketing cycle. There is not much going on. I am highly suspect of this recent run up in price from the initial correction.
Cotton prices are being driven higher by supply tightness which could very well be a short term phenomena. For the week ending 03/11/2010 net upland Cotton sales were 263,200 running bales for delivery in 2009-10. This was double the previous week and up 43 percent from the prior 4-week average. Traders were looking for 200,000 bales.
Will U.S. planting intentions remain at 10.1 million acres for the 2010-11 growing season? I tend to doubt it. As they say “Show me, I’m from Missouri”. There is a distinct possibility that a bumper crop will be produced by the U.S. growers. Wednesday’s Cotton industry report stated that an 18 percent increase in production from African nations is a good possibility this coming season. This being the case, expect to see lower Cotton prices as the year progresses. Do keep in mind that poor growing conditions and or disease could put a damper on production.
Presently, Cotton appears quite strong. But, notice how the strong U.S. dollar is having no effect on the Cotton market. I am not a believer at this point in time and will take to the sidelines awaiting a clearer picture.
May Cotton must close above 84.54 Friday March 19th to turn the weekly trend up.
Do not trade without protective strategies such as stops and or options.
Sugar 03/19/2010
Life Time Trading Range 2.30 Cents – 66.00 Cents per Pound
Trades on The ICE 2:30 AM – 1 PM CDT
This week Sugar spiked below the 61.8 percent Fibonacci retracement of the barn burning rally to 30.00 experienced not so long ago. This is considered a normal pull back and a favorable area for a corrective rally to begin. The low of the break was 17.66 so far; it occurred during Wednesday’s trading session and was the lowest price for Sugar in eight months. Sugar then made a high of 19.07 on Thursday. There is formidable resistance above at the 50 percent Fibonacci retracement of 20.45 running through an area of congestion from 23.50 – 24.00. Even though a corrective rally may be in the cards, now is not the time to be bullish Sugar.
Many buyers took a wait and see approach while waiting for the Sugar market to bottom. Now that it appears to have significantly done so, cash market participants with short term needs will likely be covering them. Sugar prices are high in Mexico. And there are reports of an increase in Sugar smuggling from neighboring Guatemala. There is news that some producers are refusing to sell Sugar at this price level, and prices for Sugar in India have spiked upwards of 7 percent over the last week. It’s just this type of activity that can bring on an increase in Sugar prices.
Now let’s investigate the future. Many Sugar traders are spooked by the Sugar that was not harvested in Brazil last season. I truly believe that Sugar has been spoken for. The only problem I can see is in the arithmetic. If buyers of that Sugar decide not to honor their contracts, pay penalties, buy the Sugar in the cash market and turn a profit by doing so, they will! If things go that route, the unharvested Sugar will most certainly weigh on prices as it adds to supply.
Everyone is expecting extremely large crops from Brazil and India this growing season. This seasons Austrailian Sugar crop is expected to increase by close to 8 percent. It looks to me that the worldwide Sugar deficit is no more.
My analysis tells me that all surprises in the Sugar market will be to the downside. Take advantage of strength in Sugar and sell into it.
May Sugar must close above 20.03 Friday March 19th to turn the weekly trend up.
Do not trade without protective strategies such as stops and or options.
