THE EXPLOSION IN COTTON, NATURAL GAS, OATS, AND COLLAPSE IN COFFEE
October 6th, 2021
Next week I will have my BestWeather Spider and update a bit more about La Niña and South American weather. Here is a summary of some of my trade recommendations over the last few months. In addition, I’ve added what I may be considering in the weeks and months ahead.
- OATS: I have been bullish this market and prices are making new highs on historical tight stocks. The trade is up at least $3,000- $5,000 a contract since my recommendation. Use trailing stops to preserve profits!!!
- NATURAL GAS: Yes, I did not catch this recent move up. In fact, it is not weather-driven right now, but rather, it is panic buying ahead of winter. Pretty soon, I may have an “inverse short ETF strategy” in this market. This stems from my feeling that late autumn, and (possibly) early winter may be warm. On Monday, I did recommend selling short the December $8 call for about 60¢ ($6,000 a contract).
- COFFEE: One reason why I was not more aggressive again recommending a buy in coffee the last few weeks, was because of my forecast of very important rains in October for Brazil. Other forecasters changed their forecast yesterday and coffee broke nearly 900 points. Before the price collapse, I recommended liquidation of any long ETF (JO) positions and to actually sell the December $2.20 call option, early Monday, at around 600 points ($2,000) a contract. At any moment, crop scouts can come out with more dire discussions of the recent Brazil damage, but my bias is to look to sell strong rallies the next few weeks or so (Big change from what we have seen the last 8-9 months).
- WHEAT: At one point, there was about 50-60¢ ($2,500+) profit long wheat on my recommendation after the September crop report. Very tight stocks and a bullish USDA report helped prices soar. The strong dollar makes me nervous being too aggressive up here. Longer term LA NIÑA could be bullish for prices. But charts look a bit toppy for me and I think I would rather just have traders book profits and wait, due to influence from outside markets.
- CORN/BEANS: I have been neutral-to-bearish these markets since this drought hype in mid July. My advice was very cautious, however, with some suggestions of being short calls or long puts, nearly 2-3. months ago. Right now, I am unsure, but after harvest may be a buy on Argentina La Niña weather problems
- SUGAR: I was cautiously bullish sugar since early July on the Brazil drought and the frosts in Brazil. Stronger crude prices are helping this market due to the ethanol part of the equation. I am unsure if harvest delays in India may be a short term bullish impact the next few weeks. With important rains coming to Brazil into November, my confidence is LOW in this market right now. There may even be a selling opportunity soon (not sure).
Models turned much wetter the next two weeks for Brazil coffee and sugar cane, something I pointed out two-three weeks ago with my longer term outlook.
A few rain events do not make a crop, but most of my research has suggested improved weather through November. This will likely prevent coffee futures from making new highs, unless things change deeper into the Brazil summer. This market may remain volatile and can always rally back on future crop estimates, and tight stocks etc. That is why selling out of the money call options on rallies may make the most sense.
BAL : Cotton prices soared to decade highs in 12 days. Cotton futures are trading at their highest levels in a decade, which could lead to higher clothing prices in the months to come. The most active cotton futures contract was trading over $1.13/lb. as of early Wednesday morning. This is nearly a 25% rally since I mentioned in my report about 2 weeks ago about why I was bullish and to potentially buy cotton, as we were breaking resistance. This could add to inflation fears. It isn’t necessarily good for the stock market, perhaps.
So… what are the reasons cotton prices are going higher and where do we go from here?
A) Extreme buying from China
B) Pent up post-COVID demand, similar to what happened in many raw materials and commodities (like lumber)
C) Pest problems, high humidity, and heavy rain in Punjab India
D) Lower US cotton acreage from the western drought and recent flooding in the deep southern US
E) Technical buying above long-term resistance two weeks ago
Some of you are long cotton and, while part of it is weather, I would be cautious buying this market right now, if you are not already in. Raise stop to preserve profits, perhaps around the $1.10 area. It is possible prices could go to $1.30 or higher in the weeks or months ahead, as the charts look positive. Otherwise, I do not want to “look a gift horse in the mouth” and would use this rally to book some profits. It really was not until about 2 weeks ago that I was following cotton and even mentioned my feeling about it.
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