Softs, Grains Still Offer Upside Opportunity
There has been plenty of discussion about the stock market and the Federal Reserve's emergency 75 basis-point interest rate cut. So rather than focus on financials, where the outlook remains uncertain, I am going to discuss some markets I believe will offer opportunities for buyers this year, once the general market turmoil starts to calm down. I'm long-term bullish sugar and cotton, and I also think the incredible rallies in grains still have room to run.
Sugar
I think sugar is set up for a major rally this year. Looking at a daily chart of sugar daily chart, we can see a lot of congestion, with prices in a range between 9.50 cents and 10 cents a pound for an extended period of time. To me, this sideways action means the bottom is in, as market prices are close to the cost of production. Last week, there was a report from India that prices are so depressed, sugar farmers are neglecting crops. Yields are expected to decrease, and accordingly, supply. Forecasts had been for a yield of 28-30 million metric tons, and that's now dropped to 26 million. India is the world's second largest producer, behind Brazil. China, also a key producer, has suffered drought in its main growing region, which may also sour their sugar crop. Late last week, even before the Fed threw a number of markets on a rollercoaster ride, we've seen volatility hit sugar with widened trading ranges. There were reports a Brazilian mill was over-hedged, and forced to cover short positions. Others came on board buying too, and ran the market up. Now, sugar is correcting back. I see 11.60 as support for the March ICE Futures contract.
Of course, there are other fundamental influences that could affect prices–namely a global economic slowdown. Recession is the big scary thing right now that will affect all the markets. This may create some short-term nervousness in many markets, including this one, and cause prices to retreat. Nevertheless, I see higher levels longer-term, by year-end. The ethanol story, of which sugar is a source, remains big. And, hedge funds and commodity-index funds are looking for places to invest their dollars. They were buying around 10 cents, and helped spike the market up to 13 cents. Now, the market is back at a level where I would recommend you can consider buying on a light level. I am not saying you should rush out and buy right away, pick your spots and use appropriate risk-management. I feel good about this market this year.
Cotton
Cotton is another softs market I see as a great buying opportunity in the coming year. You can see the choppy trade evident in the chart below. Supply has been decent, but demand is also increasing. For the second year in a row, cotton is competing with crops like corn, wheat and soybeans for acreage, and cotton has lost out as farmers feel other markets offer more profit potential. But eventually, as supplies decrease, this shift will turn favorable for cotton prices. March cotton futures are currently trading around 73 cents per pound, and I see prices getting back to 90 cents or better. I think 70 cents looks like a good place to consider buying, and we might see that soon.
Grains
I am also still bullish corn, beans and wheat, even though we've seen these commodities forge huge gains in the past year. We get planting intentions in March, but we are already hearing projections of 90 million acres of corn, on pace with last year's record crop of about 91 million. We expect demand to outstrip supply. We have global shortages in wheat, which is getting more respect recently, trading recently above $10 a bushel. And traders are still talking about "beans in the teens" as they finally crossed the $13 a bushel threshold.
All these markets have spiked up but subsequently corrected back, which is a healthy and normal test of strength. Despite the pullbacks amid general market malaise right now, I see higher prices between now and year-end for grains. Keep in mind, even if the fundamentals look good for commodities, the fallout from financials will likely be felt in many places and could linger. Participants that need to meet margin calls in other assets may turn to selling commodities. But once this dust clears, the commodity bull run should be back on track.
Frank J. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at fcholly@lind-waldock.com.
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