Softs Review for The Week of Dec 13th, 2010
Review on the Softs market again to be ready for your new trading week! Just check out to see what Pitguru Jurgens H. Bauer already noted for you!
A shortage can be driven by demand, or supply, or both. I think demand for commodities is on the rise as they grow in favor among investors. This growing demand leaves open the opposite end, the supply of willing sellers. As prices rise the market ought to see the additional supply of sellers grow, right? Or maybe not so much so, since the trend upward attracts fresh buying from specs and in some cases upside call protection from trade participants protecting financing. Under such a situation you then need to view the fundamentals of the underlying instrument to ascertain how soon additional supply will become available to meet the increase in demand. If there is obvious demand for cotton you can expect plantings to increase. If there is increased demand for coffee you can expect plantings to increase. To mature and be available for use cotton crops take a season, coffee plants take several. Sugar crops take a season, cocoa several, same too with oranges. Among the soft complex, I like the prospect for higher prices stemming from increased demand for ownership of commodities, but feel cocoa and coffee offer better long term opportunities than cotton and sugar. The jury is still out on FCOJ. I can see some of this reflected in the spreads between the front and back months.
Last week I saw gains in cotton and coffee. Sugar moved sideways, Cocoa, which initially surged, dropped sharply, closing lower for the week. FCOJ settled up on the week, but like cocoa, had surged early on. The one constant was the sizable price moves seen in the entire complex. This has become the new norm, large swings happen with greater frequency.
Volatility, perhaps the single most influential component of any pricing model based primarily upon Black Scholes has increased and rightly so. I suspect that the past performance of historical low levels of volatility is not to be seen again anytime soon. The pattern of price movement is regularly larger in today's market place and stems from a few factors, including the adaptation of electronic trading. Fund participation, which is at record levels is another, especially when large orders flow into or out of the marketplace. Above I mentioned a third the use of options. My point is that I think option volatility will remain high relative to historical levels among the soft markets.
Between now and year's end expect volatile markets focused on the world economy. I favor longs in cocoa, (thinking it cheap relative to other commodities), and like coffee on the long side. Skeptical towards sugar and cotton, but feel they too may strengthen.
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