So Long, Cotton...I'm Just Too Wary of Deflation

I have to admit - I think the Great Deleveraging permanently seared my psyche. I haven't been the same since.

It's for the best. Until you live, and invest, through an event like that, I don't think you can appreciate the awesomeness of the destruction. A history book just doesn't do it justice.

When it came time to roll my cotton position last Friday, I reflected on whether or not I wanted to keep the position. That's one nice thing about trading futures - when it's time to roll, you have a check point of sorts that forces you to reflect, even if for only a second.

My plan with cotton has been to hold as long as it stays above it's lower resistance points (which is has...but just barely), and sell if I was fortunate enough to see it hit its upper resistance.

Well, I got lucky and cotton broke $0.62 - and with some serious resistance here, I was happy to sell my position.

Cotton has been doing the range trading thing.

(Source: Barchart.com)

Why not wait for a potential breakout? After all, cotton has traded north of 90 cents in the past two years - perhaps a decisive break above 63 could send it on a moonshot?

Perhaps. But like I mentioned before, I'm still gunshy. I fear that the deflation monster is still lurking in the shadows. Last time I stayed stubbornly long - big mistake. I hope that next time, I can at least make a new set of mistakes, rather than repeating the same old ones!

Remember what happened last time deflation took hold of the markets - it took hold of all of them. All assets traded together - correlation went to 1. So much for diversification...it doesn't really help to have your eggs in a few different baskets when ALL of the baskets hit the ground, and ALL of the eggs crack in half!

I guess I can't see why things would be different if we see another wave of deleveraging. The dollar would rally. Treasuries may as well. And everything else would get slammed.

At the very least, I think we're due for a correction in most assets. Optimism is quite high on, well, just about everything. Gold is everyone's darling, stocks are in the midst of a rally for the ages, and the Fed is being heralded as the saviors of the financial universe.

I'm just not completely sold on this story, at least just yet.

So, for the meantime, I'll be mostly in cash. And that means even a commodity with favorable fundamentals - such as cotton - is something I'll be casting a skeptical eye on at these prices.

Popular Posts for the Week Ahead

In case you missed them - here are the most popular posts from the past week:

• Natural Gas - In a Death Spiral?

• A Great Inflation Debate: Prechter vs. Puplava

• Marc Faber: There's Too Much Enthusiasm for Gold Right Now (Free Audio)

Positions Update - Still Like the Buck

We bid cotton a farewell, at least for now. My favorite trade is still the US dollar - I think it's due for a massive rally, at least in the short to medium term, if for no other reason than the fact that absolute everyone is bearish on the buck.

I outlined my hypothesis for going long the buck a few weeks ago, and I don't think the story has changed. Sentiment still appears to be overwhelmingly negative, and I am still not (yet) a believer in the inflation story.

If the facts appear to change - or, more importantly, if the chart proves me wrong - I'll definitely reevaluate this position.

The dollar still sits well above its 2007 lows - at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $25,119.83

Cashed out: $20,000.00
Total value: $45,119.83
Weekly return: 6.6%
2009 YTD return: -50.6% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Holding Gold and Cash, Nonconfirming Indicators, and Cheap(er) Toilet Paper

On Tuesday evening, we had our monthly meeting of local Casey Research subscribers. Really sharp investment minds in the group - it's a real pleasure and treat to chat about a wide variety of finance and investing related issues.

The general consensus of the group (fairly contrarian in nature) is that gold and cash are the places to be right now. Gold because it's a store of value, not because it's going to $1,500 tomorrow. In fact, there was some trepidation that gold is due for a pullback from here. But everyone agrees that holding physical bullion is a good thing.

Short term market outlook is very cautious on the whole, to say the least. We are all expecting a pullback of sorts, and believe that if/when that happens, we could again see asset deflation across the board. So while most of us are long term believers in gold and energy plays, caution is being exercised right now.

Consumer Credit Plummets in July

I noticed a big time deflation headline on the USA Today earlier this week: Consumers Cut Outstanding Credit By Record $21.5 Billion.

As much as the Fed may be running the printing presses, it doesn't matter if the American consumer is choking on debt. Remember that shrinking credit is really the cornerstone of the deflationary hypothesis.

Because we have a credit based monetary system, credit can shrink faster than the Fed can print. At least in the short term - say the next 2-3 years. Of course, we could see inflation, or hyperinflation after that - but possibly after a huge wipe out in asset prices.

If the Fed can reinflate the credit bubble one more time, soon, then yes, all bets are off. But there doesn't seem to be any indications of this actually working - yet. Though perhaps $1,000 is an early warning signal. We shall see!

Wages Continue to Drop

Nice article by Rob Parenteau in Wednesday's Daily Reckoning about labor costs entitled Unlabor Day. I like his stuff - it's quite thorough and balanced.

According to Rob, the recession is doing it's job, and America's businesses are becoming more productive. I believe that 100%, and it's something I wrestle with when thinking about where our economy is heading. A lot of excesses are in fact being wiped out - which is exactly what should happen. Unfortunately, the government may be creating enough distortions to nullify all the positive that's happening.

Anyway back to his article - labor costs are typically an important component of inflation (or the lack thereof). It's hard to see rising prices without rising wages. Thus for now, Rob believes inflation is on hold until we see the government's inflationary actions start to take hold:

The question remains what lies ahead after the massive quantitative easing operations of the Federal Reserve have lapsed and the bulk of the fiscal stimulus is behind us. In the very near term, we can surely expect auto sales to wilt following the end of the cash for clunkers program, but we remain impressed by what supply managers in the most cyclical part of the economy, namely manufacturing, have to say about new orders, production and export conditions. Policymakers panicked and adopted a “whatever it takes” stance, one that has proven to be the most radical outside of major wartime conditions. Looks like something took – and not surprisingly, gold is taking out the $1,000 per ounce mark at the same time.

It's Even DE-flation in Toilet Paper

Procter & Gamble announced last week that it will be cutting prices across nearly 10% of its household brands. It looks like we're at least seeing deflation in laundry detergent!

That reminds me of an interesting point Bob Prechter made in the interview we linked to last week (inflation/deflation debate with Prechter and Jim Puplava - highly recommended).

When Puplava said that he didn't see prices coming down in his neighborhood, Prechter countered and said that we're seeing rising prices in a lot of sectors that have high government involvement. Like medical care - highly regulated industries. And these price increases are due to the inherent inefficiencies of government meddling, and nothing more.

In mostly privatized industries, he says we're seeing more deflation across the board. An interesting though to ponder.

If It's a New Bull Market, Who Forgot to Tell China?

It seems ominous that China, the posterchild of this rally and lone economic hope for the world, has turned south. Remember that China turned south ahead of the US markets tanking last time. Maybe they get the news faster in the Far East thanks to the time difference?

Sure China could break out from here. But I can't help but think that the five-year chart shows a classic Fibonacci retracement since March, and nothing more.

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.

Positions Update

Rolled over my dollar index position to the December contract. I love getting the Friday morning call from my broker that I need to be out of a position, haha. Haven't had that one in awhile. My wife always jokes that if I got hit by a truck, my lasting curse to her would be a delivery of cotton and soybeans to our front lawn!

Still holding these (dogs) of positions for now. I'll repeat what I said about China for cotton - if it's a new bull market, why doesn't cotton know?

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $23,557.10

Cashed out: $20,000.00
Total value: $43,557.10
Weekly return: -3.4%
2009 YTD return: -53.6% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Robert Prechter and Jim Puplava: A Great Inflation / Deflation Debate (Free Audio)

I hope you had a good, long holiday weekend. I sure did...I mentioned at the end of the week that I'd be blogging when I wasn't drinking beer. As you can probably infer from my lack of posts, I managed to put back a few with some good friends!

Back in the saddle now, I listened (twice, actually) to a fantastic interview and inflation/deflation debate as Jim Puplava chatted with Robert Prechter on his Financial Sense Newshour. Here's the link to the interview: http://www.financialsense.com/fsn/main.html

Note: It's the September 5, 2009 post that you want to look for. And as a bonus, he also interviewed Neil Howe, author of The Fourth Turning! I've got that one next on my iPod, and will do a post on that afterwards.

Despite gold approaching $1,000, and the equity markets rallying north of 50% over the past few months, Prechter is holding strong to his deflationary stance. In fact, he goes as far as to say he can't see a hole in the deflationary argument!

Listening to Prechter's answers, I have to say it's real tough to poke a hole in his line of reasoning, which is always very thorough, and usually contrary to popular opinion.

Here were a few of the highlights for me:

• Prechter actually called the Fed's actions "fairly conservative" - not quite as conservative as the 30's, but conservative nonetheless.

• He believes that the Fed can do NOTHING to prevent deflation. Basically, because we have a credit bubble. And as that credit goes away to money heaven, even if the Fed were to print the money to replace it, at best that would be a wash.

• The core of his argument is that most debt outstanding will go unpaid. The lenders are carrying the value of this debt on their books at values that are not realistic. He says in 2007, the world woke up to the fact that these debts will go unpaid, triggering the onset of deflation.

• He's not at all concerned with the current rally - in fact, he predicted it (I can vouch for that - I've been a subscriber of his since the spring).

• Prechter is not quite as bearish on gold as he's been in the past. In fact, he admitted it will likely strike a new high during this move. He also now thinks that gold will hold up better than most assets, and even recommends a GoldMoney account for diversification purposes.

• He's looking at 2010 to be a huge year for deflation.

• When Puplava asked for a historical example of a fiat currency of a debtor nation that did not suffer from inflation or hyperinflation, Prechter cited four examples of credit bubbles in history, saying that everytime a credit bubble ends, it results in deflation (with Japan being the most recent example).

• Prechter posits the question: if inflation is a threat and a repeat of the 70's, why aren't interest rates at 5, 10, 15%?

• He also says that social mood has permanently turned towards a deflationary mindset. Thus, the Fed is "pushing on a string", and zero interest rates will not reinflate anything (a la Japan). (Brett note: I read a similar social mood comment about the Great Depression, that inflation "did not take" despite the Fed's best efforts, because of investor's mindsets).

I'd highly recommend you set aside an hour of your time to listen to this interview. Puplava's a super sharp investor, and also currently in the inflation camp - so he tosses a lot of good questions towards Prechter.

As you probably know, I've been in the deflationary camp for the past couple of months - though I am always rechecking my assumptions.

Side note: If you're interested in reading a recent newsletter from Prechter, they are actually giving out the July issue for free until this Wednesday - you can check that offer out here.

It really feels like this whole inflation/deflation debate is going to come to a head soon. Prechter believes the next wave down will be more powerful than the first, and also that it will be quite soon...as soon as now.

On the other side of the fence, we've got gold making a solid run at $1,000 (and I'm wiping the egg off my face right now from selling out in June). And some really sharp gurus predicting hyperinflation and insisting that the rally has been driven by printed money - as evidenced by the fact that bank stocks have led the charge, and they are usually the first to lead in inflationary wave.

Actually I find it interesting that since March, Prechter's script has been identical to that of the inflationist point of view. The inflationists say the rally is being led by the banks, which is typical. It will then spill over into other areas (gold, etc), and away we go. Prechter and his guys, on the other hand, say that this rally was due to happen, but it's a false hope, being driven by crap (banks, etc), and it's about run it's course.

So we seem to be at a fork in the road of sorts. The next turn may be the game decider! We'll stay tuned in for more clues here.

Sugar Money Looking For a Home?

I got a ring on Thursday from my commodity broker in Chicago - I have an IRA managed by his firm, that's separate from the one featured in this blog. I asked him what he thought of cotton - he still likes the trade, citing the fact that cotton traded up towards 90 cents fairly recently.

He also mentioned that the sugar trade is looking a bit long in the tooth, and that fund money may flee sugar soon looking for the next big ag trade - which could be cotton. Check out the money running for the sugar exits already!

Sugar traders are stampeding for the exits!

(Source: Barchart.com)

Recent sugar reading: Sugar Prices Hit 28-Year High: How's Jim Rogers Playing It?

Positions Update

No new trades. I still like the buck. And still holding cotton to see what happens from here.

While I am currently in the deflation camp, I also realize it's very possible that I'm wrong! So we'll keep an eye on the charts.

As always, thanks for reading!

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Current Account Value: $24,386.64

Cashed out: $20,000.00
Total value: $44,386.64
Weekly return: 2.1%
2009 YTD return: -52.1% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Sugar Prices Hit 28-Year High - How's Jim Rogers Playing It?

The severe supply/demand imbalance in sugar fundamentals has propelled sugar prices to a 28-year high. The big driver of the rally has been India - which, as we reported earlier this year, has turned into a net importer of sugar.

As you can see below, sugar prices are starting to go "parabolic." Commodity rallies typically end with a big blow off and stories like this one by the mainstream financial media, questioning where the world will ever find enough sugar to meet demand.

Sugar mania is running wild!

(Source: Barchart.com)

If you are an adventurous trader, you could initiate a long position and try to ride this spike up for as long as it goes. I personally do not have this stomach for this, having been burned one too many times on the inevitable reversal. Parabolic spikes rarely end quietly.

I hope that you, Dear Reader, played this trade better than I did. Since writing on March 1 that sugar could stage an impressive rally, my follow through trading was quite poor...to say the least!

Ah well, if you missed this rally - be patient. We should get another shot at it - at least according to our favorite sugar guru Jim Rogers, who told Bloomberg:

“Sugar is certainly going to go much, much higher during the course of the bull market,” Jim Rogers, chairman of Rogers Holdings, said in an Aug. 6 interview in Singapore. “Sugar is still 70 percent below its all-time high and not many things in life are 70 percent below what they were in 1974. Sugar has a wonderful future.”

What's the easiest way to invest in agriculture if you don't trade futures? Check out our recent piece: 5 Easy Ways to Invest in Sugar...And Other Agricultural Commodities.

Sugar Shines on Manic Tuesday, Nears a 3-Year High

It's been a manic start to the week for commodities and currencies...deflation was "back" yesterday, with investors running back to the dollar...and today inflation was the focus, with the dollar getting dumped!

Last evening, we observed that sugar was standing tall amidst an across the board selloff in commodities. Well today, that strength carried through in a big way - with sugar up nearly a full cent on the day!

July sugar futures closed the day a shade under 16-cents, which was exceeded briefly this April and May. The October contract closed near 17-cents, a high on the year. If this jump holds, we'll be looking at picking up an October sugar contract on this mega-breakout.

Sugar me sweet, baby. (Source: Barchart.com)

What are the fundamentals driving this? The supply/demand deficit that has been on the radar screen since earlier in the year.

Caution is warranted, though, as a pullback in oil could send some of the hot money to the exits just as fast as it appears to be pouring into sugar. But for now, the market seems to be telling us that the sugar bull is back!

Jim Rogers: The US is About to Have a Currency Crisis

If you have the majority of your savings in US dollars, this may be the most important insight you ever hear from Jim Rogers.

In an interview with Bloomberg from this morning, Rogers said:

“We’re going to have a currency crisis, probably this fall or the fall of 2010.  It’s been building up for a long time. We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”

Jim reiterated that the place to be invested is in commodities, particularly agriculture:

"You're going to have serious food shortages in the next 3-5 years - prices are going to go through the roof."

You can view a video of this entire interview using this link (click on the "Video" tab on top).

Want some ideas about agricultural commodities with particularly appealing fundamentals right now?  Check out This Week in Commodities, which is heavily focused on agricultural commodities - right now we're invested in sugar and orange juice, both profitable trades to date and still climbing.

More recent insights from Jim Rogers:

• Rogers believes world is heading for Depression
• Jim interviewed by GoldSeek Radio
• Rogers prefers oil over gold right now

Ed. Note: I just got done reading Jim Rogers' new book - review to follow. Long story short, it's an insightful, quick read that I'd highly recommend. Pick up a copy if you haven't already:

A Long Overdue Sugar High

This morning, I authored a guest piece for the folks at Commodity News Center, breaking down the recent sugar rally.  Regular readers will be quite familiar with the fundamental factors discussed.  I always try to constantly re-examine my assumptions to make sure I'm not falling in love with a trade - if you've got a sugar position, or are thinking about initiating one, you may want to review the article - and let me know what you think!  I always appreciate and learn from outside perspective.

A Long Overdue Sugar High

Sugar futures are soaring – to their highest levels since 2006 - buoyed by strong supply/demand fundamentals, along with freshly printed US dollars. How long can this rally continue? Let’s review the driving factors. 

Contents:

• Supply/Demand Fundamentals
• Money Printing
• What Could Go Wrong
• Outlook for Sugar

Read this piece at Commodity News Center...

Why Agriculture Prices Have Held Up Remarkably Well

A recent piece in The Economist highlighted the recent strength of agriculture prices in the face of the downturn, and the reason for it.

Though prices of the meats, grains, and softs are still off their 2008 highs - they're not off by much anymore - as commodities such as cotton, soybeans, and sugar are starting to rally in a big way. 

How could this be?  Aren't we in a Depression?  Perhaps, but supply has come offline in a big way, while demand has remained strong.  As the Economist piece points out: "No matter how bad things get, people still need to eat."

It's looking like, though there were many bubbles in 2008, China's food consumption was not one of them.  Back to the article, with some staggering numbers:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

And remember, many food stock levels are at historic lows.  Unless new supply comes online soon - and I don't know where that supply is going to come from - we could be in for a whale of a rally in food.

Read the full article in The Economist...

Further reading about investment opportunities in agriculture:

• Soft Commodities are Starting to Scream: "Inflation!"
• Sugar Futures Rally, OJ Takes a Breather
• Time to Invest in Orange Juice?

Soft Commodities are Starting to Scream: "Inflation!"

Milton Friedman said that inflation is "always and everywhere a monetary phenomenon."  Judging by the recent price action in many of the soft and agricultural commodities, they appear to agree.

Ben Bernanke, a student of the Great Depression, is making a bet the Friedman was wrong.  Bernanke believes that because Friedman did much of his work during a period of time when the velocity of money was relatively constant, he did not properly account for this factor in determining inflation.

Helicopter Ben is conducting this "Great Experiment" of money printing to stave off a Depression based on the monetary theory developed by economist Irving Fisher, who believed the Depression occurred because money velocity dropped off a cliff, and there was no increase in money supply to counter this.  Thus the US slipped into a deflationary spiral.

This is the big question - when the velocity of money drops, as it is today, should the money supply be increased?  Who's right - Fisher or Friedman?

We don't yet know - though, as always, the market will decide the winners and losers.  And lately it's hard not to notice what the commodity markets have been telling us, especially agriculture.

First, let's see Exhibit A - the adjusted monetary base of the US, which still appears to be in a "bull market":

Many of us saw the initial spike and immediately yelled "Inflation!"  We loaded up and gold and ran for the hills.  And what happened?  The spike in monetary growth continued to grow to the sky, and gold got slammed - along with almost every other asset class.  (Save the US Dollar and US Treasuries - hats off if you had that trade, as you are a true "contrarian's contrarian"!)

Fast forward to a few weeks ago, and we noticed that not only had commodities appeared to have formed a bottom, but they were starting to climb.

This week, we saw a full fledged break out in the softs and the grains - let's quickly have a look at three of our current favorites.

Sugar futures - our old favorite - rallied over 5% this week, to close a shade under 15-cents.  Sugar's been on a steady climb - fundamentals look quite appealing, as we discussed last week, and there's no arguing with this chart:

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View the full YO/K9-NM chart at Wikinvest

Cotton futures continued their strong rally, breaking right past the low 50's resistance we were keeping an eye on:

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Finally take a look at Soybeans!  This rally was kicked off when soybean acreage came in below expectations, and it's been off to the races ever since:

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View the full S/K9-CB chart at Wikinvest

So which will it be, inflation or deflation?  Don't get too hung up in economic theory - remember that the markets are always right.  And right now, these markets, buoyed as well by strong fundamentals, appear to be casting an emphatic vote for inflation!

 

Top Commodity and Economic News...

• Why gold is going much higher than $2,000
• Jim Rogers interviewed by GoldSeek Radio
• The US is now "swimming" in Natural Gas
• Atlas Shrugged sales are soaring!

Current Futures Positions

Nothing new...unfortunately!  I thought about adding to the sugar position on Thursday - and I should have!  Will seriously look at adding another contract tomorrow or Tuesday on continued strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09  Long  1 JUL 09 Orange Juice 81.95 85.10 $472.50

04/20/09  Long  1 JUL 09  Sugar #11     13.79  14.91$1,713.60

Net Profit/Loss On Open Positions $2,186.10

Current Account Value: $26,920.49

Cashed out: $20,000.00
Total value: $46,920.49
Weekly return: 3.5%
2009 YTD return: -47.0% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Editor's Note: This article was also published by SeekingAlpha.com.

Sugar Futures Rally, OJ Takes a Breather - This Week In Commodities

Sugar Futures Surge to a 6-Month High

Sugar futures rallied nearly 4% on Friday, over half a cent, to close the week at 14.18.  Looks like we've got a new breakout to the upside!

Sugar futures continue their steady climb.  (Source: Barchart.com)

The market continued to focus on the news that India may turn into a net importer of sugar this year.  Indian production is falling to a 4-year low, which, surprise surprise, is spurring prices up.  Don't worry though, Indian politicians are on the scene, with rhetoric and threats of banning futures trading to "halt" this price rise - ha!  

Also bullish for sugar is continued strength in oil prices, which means Brazil will use more of its sugar for fuel.  Last report I recall reading had Brazilian ethanol profitable at roughly $50 oil, so that's the number I keep an eye on.

Finally demand for sugar is still projected to outpace supply this year, so we've got some strong underpinnings for a sustained rise in sugar in the months to come.  

OJ Takes a Breather

Orange juice futures took a bit of a breather this week.  Appears to be just a technical correction and profit taking, as I was not able to find any fundamental news to challenge our initial hypothesis for going long OJ.

Orange juice cooled off this week.

Other Commodity and Economic News

• Oil supply is coming offline at a breathtaking clip
• Natural gas is nearing its cost of production
• How bad will the financial crisis get?

Current Futures Positions

Rolled the May contract over to July earlier in the week.  Other than that, not much new. 

Thinking about adding to OJ, sugar positions on further strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09  Long  1 JUL 09 Orange Juice 81.95 85.00 $457.50

02/27/09  Long  1 JUL 09  Sugar #11     13.79  14.12 ($672.00)

Net Profit/Loss On Open Positions $1,286.30

Current Account Value: $26,020.69

Cashed out: $20,000.00
Total value: $46,020.69
Weekly return: 0.1%
2009 YTD return: -48.8% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Three Soft Commodities Poised to Rally - OJ, Sugar, and Cotton

For a few weeks now, we've been watching the commodity markets with rapt attention, asking ourselves: "Has the next commodity bull market officially begun?"

From the charts, it looks like broader commodity indeces may have finally formed a bottom.

Source: BarChart.com

So if the wind is indeed once again at the back of us commodity investors, which commodities hold the most promise right now? Let's dive in and review three very intriguing soft commodity opportunities.

Orange Juice

Orange juice futures continued their recent rally this week, with July OJ breaking out to 6-month highs this week, closing at 88.25.

Last week we were drooling over OJ, citing potential bullish catalysts of:

• Dry conditions in Florida that could hurt supply
• Reports of a weaker orange crop in Brazil
• A favorable technical back drop

Also my commodity broker gave me a ring on Thursday, recommending some summer OJ calls - he also likes the bullish setup, and mentioned that OJ is seasonally strong in the summertime.

Orange juice, after a long drop, appears to be showing some signs of life.

Florida did get some rain this week, which set prices back temporarily midweek, but this proved temporary as OJ surged ahead on technical buying and traders starting to pile in.

Bottom line: OJ's rally looks poised to continue, and we're looking to add to our exisiting position on further strength.

Sugar

On February 27, we went long one May sugar contract (which reminds me - I need to roll that baby over tomorrow 1st thing! The wife would not be pleased if we took delivery on that contract!).

At the time, we cited these bullish fundamental factors:

• The global sugar deficit is expected to rise this year
• India, the world's 2nd largest producer of sugar (after Brazil), will have lower output than forecasted, and may be forced to import sugar this year

Sugar has been rangebound.

Since then, sugar has been rangebound, failing to break up or down. I've read many traders recommending short positions on sugar in the short term, though sugar has not yet broken down in the short term as these folks have expected.

Bullish supply news came out this week, with India's sugar industry reporting that this year's production will fall 8.4% below previous estimates.

We're holding our exising position until the market gives us a clear signal on which way sugar is heading.

Cotton

Cotton futures have been slammed since the financial collapse, as significant cotton demand from India and China has evaporated overnight.

This demand and price wipeout has accelarated the decline in farm acreage devoted to cotton - this year's US cotton acreage is projected to be 7% below last year, and the lowest total amount since 1983, due to high production costs and low prices.

Although supply is coming offline significantly, thus far demand has dropped faster than supply. This may not last for long though, as the best cure for low prices is often low prices.

Has cotton formed a double bottom?

As you can see from the chart above, cotton has put in a double bottom of sorts, and is approaching an upward resistance point in the low 50's. 

Cotton futures have rallied to a 10-week high on continued strength in soybean futures, which surged to 6-month highs themselves.  Because cotton and soybeans compete for acreage, high soybean prices make it more likely that farmers will switch acreage from cotton to beans.

We're watching closely to see which way the price breaks from here, as a breakout to the upside could have some room to run, given the tight supply conditions. A small rebound in demand could set prices off to the races.

Current Futures Positions

No changes this week. Thinking about adding another OJ contract on further strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09 Long 1 JUL 09 Orange Juice 81.95 88.40 $967.50

02/27/09 Long 1 MAY 09 Sugar #11 13.79 13.19 ($672.00)

Net Profit/Loss On Open Positions $295.50

Current Account Value: $26,005.31

Cashed out: $20,000.00
Total value: $46,005.31
Weekly return: 3.6%
2009 YTD return: -48.8% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Time to Invest in Orange Juice? - Weekly Commodities Review

Have Orange Juice futures finally found a bottom?  May Orange Juice futures gained nearly 10% this week, on speculation that drought conditions in Florida could damper yields.

As you can see, OJ has been in free fall over the past 14 months, dropping roughly in half from peak to trough.

Prices appear to have been forming a bottom since the beginning of the year, and in surging past the 85 cents-a-pound level, May Orange Juice futures hit four-month highs.

So is it time to buy?  Let's break it down.

Bullish factors for OJ:

• Renewed weakness in the US dollar could buoy commodity prices
• Dry conditions in Florida could hurt supply
• There are reports of a weaker orange crop in Brazil
• The technical setup looks quite good

Bearish factors for OJ:

• The deflationary environment that sent almost every asset down 50% last year may still be in place
• Good news on the Florida crop could cause this rally to quickly reverse course
• OJ may be overbought and due for a short term pullbck
  

OJ futures are quite volatile, so proceed with caution if you're new to trading them.  Contract sizes for OJ futures are smaller than most other softs, so I'd recommend starting with a light position and keeping wide stops to ride out potential swings.

BOTTOM LINE: At current price levels - which are historically cheap - the risk/reward of a long position in Orange Juice looks quite attractive.  We've been watching all of the softs closely, and OJ looks the best right now from a technical and fundamental standpoint.  We're buying this 3-month breakout.

Editor's Note: This article was just published by Seeking Alpha.

Current Futures Positions

On Wednesday, we picked up a July Orange Juice contract at 81.95.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09 Long   1 JUL 09 Orange Juice 81.95 85.60 $547.50

02/27/09 Long  1  MAY 09  Sugar #11  13.79  12.75  ($1,164.80)

Net Profit/Loss On Open Positions ($617.30)

Current Account Value: $25,092.51

Cashed out: $20,000.00
Total value: $45,092.51
Weekly return: 2.4%
2009 YTD return: -50.6%

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Weekly Commodities Report - Dropping Dollars From Helicopters

Bernanke Fires Up the Printing Presses

Earlier this week, Ben Bernanke announced the US Federal Reserve will buy up to $300 billion of US long-term Treasury securities over the next 3 months.  Where will the Fed get that money?  It will essentially create it out of thin air - also known as "printing money."

Surprisingly, the markets were not amused by Ben's announcement, as the dollar suffered it's largest one-day decline since 1971, while gold got a nice pop, rallying from sub $900, currently sitting around $950 as I type.  

Gold's recent rally may have had something to do with the fact that it, unlike the US Dollar, cannot be created out of thin air.

Amusingly, this accouncement comes on the heels of a key Chinese official lamenting the bad stench emanating from US Treasury Bonds.  Some reports I've seen recently suggest that foreign investment in US debt has fallen precipitiously, and this represents the Fed's last gasp to hold interest rates low - possibly attempting to drive them all the way down to zero.

If you've been thinking that deflation would rule the day, I'd highly recommend revisiting an important guest piece penned for us by Bud Conrad about this epic battle between inflation and deflation.

If You're Short the Yen, You're Long the Dollar - Oops

The past couple weeks I've been on my soap box, calling the demise of the Japanese Yen.  I made the case that the Yen was circling the toilet bowl at a faster rate than the US Dollar.

Oops.

The Yen spiked sharply, and unfortunately I was stopped out of my short position at a large loss.  After I was stopped out, then Yen continued to rise a bit, and has since corrected back down.

This is why my wife yells at me for trading currencies.

Ah well, sucks, but have to respect your stops.

I have to admit, this trade gone awry may have killed my appetite for currency trading for awhile.  It was easy when the dollar was on a one-way trajectory to the cellar.  

Things are just a bit too crazy in the currency markets right now for an armchair trader like me to figure out.

Depression Economics for Kids

And just when you thought things couldn't get any stranger in the financial world, Disney announces a new exhibit at EPCOT center called "The Great Piggy Bank Adventure".

The exhibit will teach kids such valuable life lessons as staying ahead of inflation, and diversifying your investments.  

You can't make this stuff up.

Current Futures Positions

Date Position Qty Month/Yr Contract Entry Last Profit

02/27/09 Long  1  MAY 09  Sugar #11  13.79  13.42  ($414.40) 

Net Profit/Loss On Open Positions ($414.40)

Current Account Value: $25,312.72

Cashed out: $20,000.00
Total value: $45,312.72
Weekly return: -12.7%
2009 YTD return: -50.2% (yikes)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Sugar Prices Continue Rise; China, India May Increase Imports

Jan. 16 (Bloomberg) -- Sugar prices rose, posting their fourth straight weekly gain, on speculation that demand for imported supplies will increase this year in China and India, the world’s largest consumer.
...

Also worth noting:

Reduced supplies from India likely will widen a global market deficit that Czarnikow Group Ltd. estimates will be 5.8 million tons this year, said Michael Ferrari, a vice president at Weather Trends International Inc. in Bethlehem, Pennsylvania.

Global market deficit! Music to a commodity trader's ears.

Weekly Futures Positions Review - December 21, 2008

Top posts from the past week:

• Inflation or Deflation - Which Will Prevail?
• Fed Out of Ammo; Dollar is Toast
• Stratfor: Oil Prices Likely to Remain Low

Our coverage of Marc Faber's recent interview on CNBC from December 1st continues to see a lot of traffic.

A review of our trades from the previous week:

• Bought a Swiss Franc position on Tuesday. Tried to pyramid with another position Wednesday night. Sold both on Friday - about even after it was all said and done. Check out this volatility:

• Bought an Australian Dollar position on Tuesday - sold it on Friday at a loss. Again, we unsuccessfully timed the breakout here.

• Bought a Mini-Gold position. Again, tried to buy the breakout.

• Bought a Cocoa position. Ditto.

Our wish list...everything here looks beaten down...silve

• Sugar
• Coffee
• Cotton
  
• Natural Gas
• Silver
• Crude Oil
• Wheat
• Corn

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
12/15/08	Long	1	MAR 09	Cocoa	2586	2587	$10.00
12/15/08	Long	1	FEB 09	Mini Gold	836.6	837.5	$29.88
Net Profit/Loss On Open Positions							$39.88

Account Balances

Current Cash Balance	$47,927.72
Open Trade Equity	$39.88
Total Equity	$47,967.60
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$47,967.60

Cashed out: $20,000.00
Total value: $67,967.60
Weekly return: -3.6% --> Mostly due to the bad Aussie dollar trade
YTD return: -11.9%

***"Cash out" mostly means taxes, but lately we've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off - and was recently covered by the Sacramento Business Journal.