The Softs Review
For the week of November 21, 2011

By Jurgens H. Bauer

Defense. And I am not referring to the chant from a football crowd, nor Joe Pa's lawyer, but rather using one word to describe the past week of price movement among the Soft markets. Defense.

Because of changes in delivery standards in the ICE cocoa contract beginning with the March 2012 delivery, which limits the amount of cocoa shells and other debris found in shipments, selling has been more aggressive in the December. This rush to deliver may clean out a lot of surplus, it certainly has pressured values. Can this set the tone for a better market? Too early to tell, but the surplus in available supplies needs to work through the pipeline first. Still too early to predict a pick up in demand, but there is some optimism brewing as Barron's mentioned in an article.

Cotton prices flip flopped, first rallying on a reaction to substantial Chinese buying, shown in solid another improvement in exports. Then dropping limit when enthusiasm disappeared. Managed money appears to have been a buyer early in the week, increasing long positions, but the COT numbers do not reflect changes after the weakness and ultimate drop of over 400 points for the week. Even with China buying, mill demand in the world is expected to remain poor, so prices ought to reflect that with little ability to rally.

Sugar prices remain negative and the March contract should continue to probe below 24 cents. Not looking for a huge drop, as there seems to be some trade scale down buying evident.

As for coffee it is so choppy. There is a historical tendency for prices to drop heading towards December, when prices then begin to rise. I remain a bear for now with the lows not far enough away.

Next up in the Macro horizon look for news on the so called "Supercommittee" (I wonder, do they wear capes?) I'll bet the committee isn't so super after all. Watch as talks stymie and with neither side hopeful that an agreement can be reached before next week’s deadline. Each side has their own special interests at heart, but why not its politics? Problem is what effect will this have on the dollar as we head into the holiday shortened week? Look for a partisan showdown in the days before Thanksgiving.

***chart courtesy Gecko Software’s Track n’ Trade Pro
Past performance is not necessarily indicative of future results.

The Grains Review
For the week of November 21, 2011

By Matthew Pierce

Coming back from the weekend the agricultural trade has nothing I see to offer bulls a handhold. On the macro side, which still dominates, Spanish elections seem to offer no support for the Euro with no real information available concerning debt restructuring ideas. Crude is backing off after bearish world economic talk coming from China. Equities are on the defensive in spite of early sentiment from the retail industry that seasonal sales will exceed expectations. The world economic outlook seems worse today than Friday with the US super committee not agreeing on debt reduction. Here’s a novel idea…Republicans and democrats working together for the betterment of their constituents. It makes too much sense to work in DC. Softs are feeling the negative pressure with both Sugar and Cotton on the defensive after the mass decline seen in Cotton on Friday.

Over the weekend traders saw the COT trim the short in wheat which goes back to the earlier week discussion of the spread movement in WH-Z. The funds are buying back shorts instead of rolling them forward. Funds trimmed length in corn with the market still long 220K. Bean longs trimmed by 20K as well leaving 26K long. Meal is short 21K with oil short 8K. No real surprise after the price action seen last week. Money feels like it is moving to a “risk off” stance into the end of the year. I cannot blame anyone for this stance. This has been a brutal year for many so ending the pain seems almost logical. I expect to see this money put back into play in the first month of 2012 but that means almost 40-days of low volume chop. This foreshadows abnormal moves like those seen on Thursday in corn. The market is skittish making unhedged flat price positions a very risky situation. More risky than normal because of the erratic price swings caused by money flow leaving fundamentals on the sideline.

Heading into the holiday week the feature is December option expiration. The CZ 600 strike is the all-star here with 38K CZ 600 puts open. The same applies in wheat but only 8K open at the 600p makes this a minor issue but still worth watching considering the CZ12-WZ12 spread. The 10-cent advantage for corn is worth watching to see if there is any impact on Friday’s expiration. Outside of options the trade simply needs to find some semblance of support which looks hard to find. Beans (SH) have given up a year’s gains with a target sitting around $11.30 for bears with indicators supporting a negative stance. Implied volatility in March bean options at 21% makes the puts an attractive purchase versus shorting calls from a bearish perspective. CH looks to gravitate to about 608-610 late this week as CZ approaches 600. The spread between CZ-H should widen moving closer to delivery with the export market for corn evaporating. Ethanol is the only real immediate pull for corn but it is strong. Watch crude for direction here with the Euro also offering great directional indicators. WH is dramatically oversold on the chart and funds should continue to cover shorts into the end of the year. That’s the good news for bulls, the bad news is the rains over the plains offering a break for HRW producers in the eastern half of OK, KS and TX. Rains even fell west of Garden City Kansas but only in scattered amounts. This actually offers more support to Minny in that any real quality wheat produced in southern states comes from the western region as compared with the east. The SRW looks good with ample moisture in many regions offering bears another handhold. The only fear I can find for bears is the fund short. With 45K remaining there is ample ammo for a rally if coupled to the oversold daily indicators.

As for today, the sentiment is lower across the board with beans showing the most weakness. No real issue noted overnight in spreads with someone getting cute with the KWZ-WZ spread on the close tapering it in to 8.75 (carry) versus the 10.5 trade just minutes before. I love that electronic markets are trusted more than human markets. Unreal. Look for a downside day and week as long as the Euro remains under pressure and crude consolidates back under $100.00. Option expiration will be the focus of the trade all week so look for plenty of action on either side of $6.00 in CZ.

Disclaimer: Past performance is not indicative of future results. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Fundamental factors, seasonal and weather trends, daily news, and other current events may have already been factored into the markets. The use of stop loss or contingent orders may not protect profits and may not limit losses to the amount intended. Certain market conditions make it difficult or impossible to execute such orders.