Investors seeking diversification for their option writing portfolio may want to consider the often overlooked softs markets. While commodity rock stars like gold and oil often dominate headlines, softs are known for respecting their fundamentals and not as susceptible to outside influences such as interest rate hikes or international events. This week’s focus is a peek into the softs world, with some suggestions for upcoming opportunities.

Cotton

Cotton spent the week consolidating after last week’s sharp sell-off in conjunction with equity prices. Specs may have realized this week that they may have thrown the baby out with the bathwater.  The trade was nervous that a slowing economy would hurt US demand. However, cotton faces a double booster of growing global demand combined with some serious acreage competition in 2008. Farmers are busy readying planting intentions for the Spring and with record high prices in corn, wheat and soybeans, cotton looks to get the short end of the stick. This means less cotton in the fall, which should be long-term supportive to prices. We expect funds to begin reestablishing longs at this week’s consolidation level. However, we don’t see premiums high enough to write any puts as of yet.

Orange Juice

Juice saw very little change this week as market participants wait for the USDA to announce Florida’s estimated crop size early this month. While last month’s figure was unchanged from the prior months at 168 million boxes, some estimates have this month’s figure 2-3 million boxes lower which could lend support in coming sessions.

Cocoa

While many commodities in the softs patch saw this week’s prices consolidating, cocoa was one of the week’s big winners as new contract highs were scored on Friday at $2337 per ton basis the March contract. This puts the market up $125 per ton on the week.  While bullish fundamentals are deeply entrenched in this market, we’ve heard rumblings of producers are finally looking to sell this rally as beans will once again flow out of the Ivory Coast. With growers willing to sell at current levels, a pullback in prices can be expected in the near term.

Sugar

Sugar prices consolidated this week as the world awaits direction from the energy markets. Producers worldwide will be implementing sugar production towards food more than earlier estimated if energy prices continue to work lower.

Coffee

In addition to cocoa, coffee enjoyed price strength this week as New York Arabica prices were dragged up kicking and screaming by London Robusta. Vietnam, the world’s second largest robusta producer continues to hold Robusta beans off the market as the world waits for the Brazilian harvest to begin. As this is still 2-3 months off, Vietnam remains the only game in town.  Continued strength could be an opportunity to write distant calls in coffee as we expect the world to be awash in fresh supply when the Brazilian crop arrives in earnest.

 
Figure 1: May 08 Cocoa

Figure 2: May 08 Cotton

Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.


James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group
Optionetics.com ~ Your Options Education Site
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