SOFTS IN FOCUS MONTHLY OUTLOOK

SOFTS: Fast FactsJune 2012

WHATS AHEAD?

Weather & Politics: Too Much of a Good Thing Gone Bad! Seasonal Swings and Spreads: Focus is on 2012-13 but What Comes Next? Crop Reports & Other Indicators: USDA Makes Subtle Changes to CottonMore Revisions are Necessary Fundamental Favorites: Bear Market Rallies ICE Update: Holiday Schedule, Record Volumes and Cotton Limits
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Weather & Politics

Too Much of a Good Thing Gone Bad?
This is a critical time of year for having adequate amounts of rainfall to sustain crops, but too much moisture could slow harvests while too little rain could retard their development. Currently the Pacific Ocean temperatures are in a transition phase with a possible El Nio beginning later this year that is already starting to have some influence over rainfall levels in key countries around the world. Brazil is receiving too much moisture in some areas and now the Indian monsoonal rains are having a delayed start. If these conditions persist, the outlook for crops, such as sugar, cotton and grains could take a turn for the worse dashing hopes of a promising start that would have led to an improvement in production 2012-13. El Nio and La Nia are typically defined as sustained sea surface temperature anomalies (positive and negative respectively) greater than 0.5C across the central tropical Pacific Ocean. Clearly the warming in the eastern equatorial Pacific and Pre-El Nio conditions can create a stir in the markets with traders already trying to draw parallels to the last significant El Nio event in 2009. There are differences though which meteorologists are noting especially with the stratospheric winds that could keep this years potential El Nio from being too harsh if it even fully develops. In 2009 for instance, rain lingered over the important center/south sugar region of Brazil and slowed the harvest, created port loading delays and reduced the sugar content of the cane. The rains were not expected to persist as they did and farmers kept hoping for some relief but this came too late to matter for that years harvest and also negatively impacted the cane for the following season as well. Last month the rains started in Brazil and raised some alarm, but the situation quieted as it temporarily turned dry again for a few days and then the rains returned and

potential could continue into the latter half of this month, creating some problems for sugarcane producers. The conditions in China and India are somewhat worrying for the opposite reasontoo little rain, but this is already starting to shift in China with some easing in the dry conditions. Some of the areas most impacted by the lack of rainfall were predominantly irrigated so concerns were also lessened. For the West African cocoa regions, dryness is also a concern and currently about 30% of Ghanas crop area has received below normal rainfall, but not to such an extent that it is causing damage to the crops, but certainly if the situation persists or worsens, there could be an issue for next seasons main crop. The weather in the Ivory Coast needs to be monitored carefully as well for similar reasons although Ghana has been drier than their neighboring country. The market has had mixed signals from the weather because it has not been persistently dry and to an extreme degree. This makes it harder to draw conclusions about the impact the dry spells have had, if any. It is this type of on-again off-again worry that makes the cocoa market notorious for erratic trading action at this time of year and headed to July before quieting down before the onset of the new crop arrivals. El Nio episodes bring some good as wellit greatly reduces the number of hurricanes, which will lessens the odds of damage to the Florida citrus crop but also hurricane damage to the US sugarcane and cotton crops in the southeast and potential for heavy tropical storms or hurricanes to sit over the coffee areas of Central America/Mexico which tend to dump vast quantities of rainfall. The forecasts calling for El Nio conditions to develop later this year could cause temperatures next winter and spring to be above normal in many areas.

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W African Crop Outlook Improving

1.4 1.2
Ivory Coast Ghana

find a remedy ailments.

for

this

countrys

fiscal

1.0

0.8 0.6

0.4
0.2 0.0 80/81 85/86 90/91 95/96 00/01 05/06 10/11

Source: ICCO

Prior solutions to overcome domestic problems were to expand manufacturing and agriculture for export to bring in foreign currency and boost trade. This model worked when there was a ready market for increased goods. A broadened middle class and greater disposable income in emerging nations helped to fuel this, but now with the slowed growth in many countries that were looked to for future earnings, this is no longer as viable an alternative. China, India and Brazil were the top three front runners but also Japan, South Korea and Russia are all showing signs of slowed economic expansion. The other region that has been a large importer of goods is the mid-east but the events of the past year and push towards democracy has not been an easy one with more violence and uprisings continuing and Egypt remaining in a state of flux. To a certain degree it is reminiscent of the breakup of the Soviet Union and domino effect from the fall of communism that led to the tearing down of the Berlin Wall and division in former Soviet States as well as in the Baltics. Uncertainty in timing and volume of purchases in the same manner as before is at risk due to security and possible worries about credit and the ability to get financing. All this has created unease in the markets and typically this would keep commodity prices under pressure. The only time the markets seem to rally is when there is a short term infusion of hope that the corner has been turned and the situation may improve or at the very least the worst of the news is already built into current market expectationsat least until the next piece of bearish economic data or financial calamity arises that again reminds traders that the worlds problems are likely to take a long time to resolve and it wont happen overnight, in days, weeks or even months from now.

As variable and uncertain the weather can be it seems the global economic situation remains even more turbulent and potentially treacherous for the markets. There are intervals of respite from the intense problems that are building in some countries with the situation spreading to other regions beyond the current hot spots which seem to be becoming more and more numerous. World leaders and other organizations have not been able to fully come to terms with the gravity of the situation at hand or mobilize to do anything effective at stabilizing the world economy that continues to hang in the brink of possible chaos with some countries already dangerously close to the edge of a cliff. Bank runs and bailouts are occurring but the money flows out are happening at an accelerated pace in Greece and Spain and could happen elsewhere as confidence is shaken with Italy seeming to be the next on the hit list. Europe has fallen into recession already from trying to bailout banks in Greece, Portugal, Ireland and now Spain. The possibility that Greece may still need to abandon the euro is a testament to how ineffectual policy has been so far at trying to stymie the situation. It cant be ignored that the United States may also be facing a day of reckoning early in 2013 if Congress cant

million tonnes.

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Seasonal Swings and Spreads

Focus is on 2012-13 but what Comes Next?
With Spring plantings now virtually completed and trees already blossomed and on their way to developing the 2012-13 crops, the market attention will be first focused on the yield potential and harvesting activity but also on early indications for the following season. This is easier to predict when markets had been at extreme levels that would have an influence on future planting decisions and for tree crops the amount of investment farmers made in maintaining and caring for their plantations already. The impact of this would tend to be cumulative assuming normal weather even if prices had dropped or appreciated considerably over the course of the current season. With the markets having peaked last year but still at reasonably attractive levels for most farmers, this should lead to ongoing investment and best care practices. Of course, production will ultimately be dictated by the weather but on first blush it would seem that production should still be heading higher for cocoa and sugar while cotton remains more of a question mark. There is a common pitfall--production cant be viewed in a vacuum and must be considered against expectations for demand. Oftentimes traders make an error in their view by believing that record crops bring on low prices and that small crops are guarantees of higher prices. This is far from reality as it depends whether demand is sufficient or not to absorb or cover the change in supply. An early indicator of how traders perceive future supply and demand (whether right or wrong) is through spreads. A normal carrying charge market would suggest that there is little worry about future supply but also that nearby needs are being satisfied. An inverted market structure would be indicative that while nearby needs are

limited, future supplies will be sufficient to cover expected demand. A rally is simply indicating that higher prices are necessary to assure that future needs are being satisfied. While there is sometimes liquidity issues in deferred contract months that could skew short term trading, the spreads, more so than the outright price, reflect the markets longer term views. Just as the outright price sometimes has a distinct seasonal pattern up or down where year after at around the same time the market is either pressured or lifted generally by hedge related activity, the spreads between contract months can also reflect these cyclical variations with known periods during any given year when the spread between the delivery months widens or contracts. This is generally easier to identify when there is a distinct new crop and old crop, such as in cotton or when production dominates in one country or state where that supply can be threatened by a single weather event such as a frost in Brazil for coffee or a freeze or hurricane in Florida that could immediately reduce the supply of oranges. For cotton on a spread basis, there are generally two popular times of year to engage in trading that are notorious for yielding positive results year after year. In March prior to the Planting Intentions Report when farmers are still determining which crop should go in the ground, December has a tendency to rise to encourage sufficient plantings as this is the first new crop cotton contract with October too early in the new season to fully reflect the harvest and supply indications. New crop July on the other hand is generally pressured in an effort to assure that demand is strong enough to absorb the next crop. Late in the year it becomes more advantageous to buy July and sell March in the belief that July will rise during the spring if there is a weather event delaying plantings and new crop or Red March would fall to attract demand. For the juice market the obvious play is to buy the nearby contract around

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Christmas/New Years in anticipation of cold snap in Florida with the coldest weeks being in January and then selling a more distant month. If there is a freeze, the nearby contract would need to soar to immediately ration supply. In the sugar market, the trading focus on spreads is generally with the October contract being the most active and also with the longest trading time until the next contract month in March. Buying October early in the year ahead of the Brazilian harvest or again just prior to the onset of the Brazilian harvest tends to yield positive results when purchased against the sale of March, May or even Red (next calendar year)October. In coffee, the down seasonal during the Brazilian harvest is widely recognized as having consistent results time and time again with the market falling under the weight of the new Brazilian crop and lull in demand during the northern hemisphere summer months. While the outright market may be under pressure, the spreads between the contract months paint a different picture. At the same traders are looking to sell outright longs, buying the March coffee contract and selling the more distant September contract yields winning results with precision.

Crop Reports & Other Indicators

USDA Makes Subtle Changes to CottonMore Revisions Coming
The cotton market had a bullish infusion of news with a huge amount of US cotton being sold to China after a lull in purchases and belief that perhaps they were done for the season. The large sales are even more glaring when one considers that it is very late in the season with less than two months remaining to ship this cotton. Given what a significant buyer China has been already the late buying spree certainly opens the possibility that China may remain a large importer in 2012-13 and may add further to reserve stocks. By any economic measure, Chinese mill use should be dropping this year from the slowed growth domestically and from weak demand from Europe, the United States and elsewhere due to the gloomier outlook. With India being a less reliable supplier this year due to constant policy changes, it isnt surprising that the US may see some spillover benefit from this and helping US sales increase. The United States is frequently in a position of being a residual supplier to the market and this year now seems to be no exception. The USDA had ratcheted up the export sales target by 200,000 bales in this months report and could be justified in increasing it further based on this data, but at the same time, the USDA lowered the expected sales projection for next season by a like amount and thus ending stocks for the United States were left unchanged for 2012-13. The June report ordinarily would not show any changes to the production figure because it is still based on the Planting Intentions Report and historical yields rather than actual field conditions. The foreign balance showed a reduction in mill demand which is in keeping with expectations and again, even the pared figure may still prove to be too high, especially if the domino effect from the

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troubles in southern Europe continue to trigger problems elsewhere, with expectations that Italy is the next country to feel the impact from overburdened debt. Despite all the worries, the USDA is expecting mill demand to rebound by three million bales in anticipation of the situation improving and low prices encouraging some restock building perhaps. Even with the increase in demand, world stocks are expected to rise by more than seven million bales and push up global inventories to new record highs. This is the overriding bearish fundamental feature for the market and could keep a lid on interim rallies. The worst scenario would be for the market to rally too much on hopes of China continuing to buy cotton and then find that China instead is releasing cotton from their strategic reserves. Cotton Remains a Bear Market with Continued Over Supply in 2012-13

too alarming at this time. Texas could use more rain, but the situation is vastly improved from last year when the crop was failing. I would be more inclined to sell rallies still then hope for a sustainable recovery until there is further supportive news to justify more of an advance.

Fundamental Favorite:
Bear Market Rallies
Picking bottoms is tougher than it would seem. Markets overshoot the downside just as they do the upside with the caveat of course being that markets cant go to zero, but they can get awfully close. In my nearly 30 years covering the Softs Complex I have seen each of the markets sink to rock bottom levels where there was absolute hardship for producers and it made no economic sense to grow the commodity but in fact, production of course continued, albeit at a slowed pace. Spot January sugar one year even plummeted to a brief low of .01 or a contract value of only $11.20! For tree crops it takes longer for production to respond to depressed values than it does for field crops that are replanted each year and the markets can languish for extended periods at rather depressed values. Markets never hold at peak prices for any length of time, but can sit for what seems like an eternity build a base to rally from. The lesson on this is that patience is usually rewarded then to continue to bottom pick at seemingly arbitrary levels simply because the market seems cheap. It can get and often does get cheaper still. There does come a point where perhaps all the bearish news would seem to be discounted by the market and therefore should be little selling left. In addition, there certainly are times when from a risk to reward perspective there would seem to be marginal downside risk compared to upside potential, especially for those markets that are prone to weather spikes.

130 120
output use

millions of bales.

110 100 90 80 70

93/94
Source: USDA

96/97

99/00

02/03

05/06

08/09

11/12

The cotton market is in a delicate spot because if it rallies to sharply in exuberance over Chinas purchases, it could shut demand off for other more price sensitive purchasers. The market will need further reinforcement that China is back in the game rather than this being a one dose adrenaline shot to sustain any rise assuming normal growing conditions. China has some pockets of dry weather but nothing that is

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However, jumping the gun prematurely can be frustrating and bring disappointing performance or trading results. Its that itchy trigger finger that needs to be avoided and looking for reasons for the markets to rally ahead of their time without letting the bear market completely run its course. Given the economic upheaval that is nowhere close to being resolved, the question I ask myself repeatedly is what does this mean for demand and then also credit? Can buyers comfortably restock inventory when they still may be concerned about obtaining financing? The worries that proverbial other shoe may drop even before year end are very real and this makes me hesitant to turn bullish on the markets just yet. The demand driver is not there and production is still in expansion mode and hasnt started to contract in reflection of declining prices. Stocks are still building. This by no means suggests that bear market rallies are not possible. They certainly are and present excellent trading opportunities. Markets can be oversold on a temporary basis and bounce from this point, but this doesnt mean once the correction is over the market wont resume the decline and sag back down again. Where I see bottom pickers being most prevalent are in cotton, coffee and sugar, but have a difficult time justifying the rationale for this on a fundamental basis. Should weather events push the markets up or rallies occur on broader economic news, I would still be inclined to sell into the rise and not expect the counter trend rally to be long lasting or sustainable just yet.

ICE Update:
2012 U.S. INDEPENDENCE TRADING SCHEDULE DAY HOLIDAY

For Sugar No. 11, Coffee C , Cotton No. 2, Cocoa, FCOJ, CCI Index and RJ/CRB Index Contracts Date Tue, Jul 3 Wed, Jul 4 Thu, Jul 5 Electronic Trading Regular hours Closed Regular Hours Open Outcry Trading Regular Hours Closed Regular Hours

ICE Futures U.S. Independence Day Holiday Trading Schedule for all IFUS products ICE FUTURES U.S. DAILY VOLUME RECORD ICE Futures U.S. set a daily volume record of 851,852 contracts on June 12, with 801,304 futures contracts and 50,548 futures options traded. The exchange's previous daily volume record of 840,591 contracts was set on September 16, 2008. COTTON PRICE LIMIT RULE The movement of cotton futures prices has triggered the ICE Futures US cotton limit price rule a number of times in the past months. As a reminder, the ICE Futures U.S. price limit rule provides for an initial limit amount that increases or decreases as the absolute price level of the determining futures delivery month increases or decreases. In addition, the rule provides for a single expansion of the initial limit amount by an additional 1.00 ct/lb. on the trading day following any day on which two or more of the first five listed months (or the sole remaining futures contract in a crop yeari.e.,July) close at limit bid or offer based upon the initial limit amount then in effect. The complete cotton price limit rule is found in ICE Futures U.S. Rule 10.09.

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About J Ganes Consulting

Food and agricultural businesses can rely on the pertinent research, expert analysis, and historical perspective of J. Ganes Consulting, LLC. Our market reports, customized research, consulting services, and workshops offer insight, on-target forecasting, and objective thinking. We filter and synthesize supply-and-demand information drawn from critical industry publications and our personal contacts in the field; we interpret that information; and we put it in a context to support your business. Visit www.jganesconsulting.com for a two week free trial to other reports available by subscription or to learn of other consulting services available including workshops or private training on risk management and the use of futures and options that can be given worldwide.

About ICE Futures U.S.

This newsletter is brought to you compliments of ICE Futures U.S. Some helpful links about soft commodities at ICE Futures are: Margins Exchange and Clearing Fees Contract specifications Cocoa Coffee C Cotton FCOJ-A Sugar No. 11 Subscribe to ICE Futures U.S. updates ICE Webinars
This report is produced by a third party service provider to ICE Futures U.S. The views and opinions offered in this report are solely those of J. Ganes Consulting, LLC. ICE has not verified the information presented, and makes no representation about its accuracy or completeness. The views in the report are not necessarily those of IntercontinentalExchange or ICE Futures U.S. and cannot be the basis for any claim against them. Futures and options trading involves risk and is not for everyone.

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