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November 2008 Archives

November 25, 2008

Could this be the start of a real "Bull" market?

The bearish stampede of Cattle prices may be coming to an end, as last Friday's USDA Cattle on Feed report (COF) shows indications that future supplies may be curtailed. Cattle placements in October were down 11% from last year's totals, as tight credit conditions limited the number of Cattle placed on feedlots. This was viewed by many analysts and traders as the most bullish figure in the report and should lend some support to back month futures, which have been hard hit the past several sessions. Cattle on feed for November came in at 93.0%, almost 1% below average pre-report estimates. Beef prices have been hard hit recently, with the USDA reporting that choice grade boxed beef cutout prices fell by $1.69 per hundredweight on Friday, as fears of continued economic weakness have curtailed retail demand, with consumers switching to cheaper proteins such as chicken or pork. Speculators have a mixed option on the direction of Cattle futures prices, with small speculative accounts holding a net-short position of 24,954 contracts as of November 18th according to the Commitment of Traders (COT) report. Large non-commercial traders were net-long 8,471 contracts, but they have cut their net-long position by 5,994 contracts as of the 18th. The COT might lead some to the belief that a short-covering rally is due, especially as small speculators exit their short positions on any correction. However, like many other commodity markets, Cattle futures have been under the influence of the equity markets, and further weakness in stocks may pull Cattle futures lower, despite the bullish fundamentals highlighted in the COF report.

Looking at the daily chart for February Live Cattle, we notice the market trying to form a near-term bottom a day before the Cattle on Feed report was released. Volume has been heavy recently, with liquidation selling and minor rolling of December positions into February accounting for the volume spike. Despite the recent recovery, prices still remain well below both the 20 and 100-day moving averages, as a rally above 91.25 would be needed to trigger additional short-term momentum buying. The 14-day RSI has recovered from oversold levels, but is still hovering just below neutral territory with a current reading of 38.93. The recent low of 83.85 is seen as support for Feb. cattle, with resistance at the 20-day moving average of 91.25.

November 26, 2008

Artificial Sweetener

March Sugar is trading higher this morning, despite a higher US Dollar and bearish report from respected research firm F.O. Licht. The data suggests that the world Sugar deficit will be 1 million tons, which is at the lower end of the firm's estimates. The report actually paints a somewhat rosy view of supplies compared to other Sugar analysts' opinions that there will be very small deficits or a small surplus. The Indian crop has been smaller than average, but should satisfy domestic demand. Indonesia, which has historically been a net importer of Sugar, is expected to have a surplus of some 2 million tons according to a government source. It will be interesting to see how the market reacts to the opinion in coming sessions, as the supply side was the main reason that Sugar has been the best performing commodity for the year, up until this point. Demand, on the other hand, could be pressured by the weak economic conditions around the globe. Emerging economies have been a key driving force behind demand for the sweetener, but these nations are especially sensitive to price fluctuations. Sweets, after all, are luxury items, not necessities. Slowing economic conditions in Brazil will likely reduce demand for Sugar-based ethanol significantly. Falling Oil prices may pressure Sugar prices for two reasons: lower petroleum prices generally lessen the appeal of alternative fuels, and freight costs have dropped as a result of lower fuel prices. The lower freight costs make Brazil a much larger global player, and with a weak domestic economy curbing fuel ethanol demand, toverextended with the bailout packages, which could weaken the US Dollar.

The March Sugar chart shows the market falling back after being unable to move above the 13.00 mark. Traders have been disappointed that the contract has not been able to cross the 50-day moving average, which could signal more sustained rallies. For the market to retain some of the momentum it built earlier this month, it is imperative that prices remain above the 11.20 level. Failure to hold this near-term support could cause some speculative and index fund longs to exit the market. To spark renewed buying interest, prices may have to advance beyond near-term resistance at 12.35, signaling a W bottom. Momentum is showing bearish divergence from both price and RSI, hinting at near-term weakness.