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					                                SOFTS IN FOCUS

                                MONTHLY OUTLOOK




 SOFTS: Fast Facts—July 2012




WHAT’S AHEAD?
Weather & Politics: Living (Standards) in a Hen House!
Seasonal Swings and Spreads: Bear Market Rallies or a New Bull Move?
Crop Reports & Other Indicators: Euro Grind Weak; Cotton Demand
Overstated?
Fundamental Favorites: No Squeeze in Juice
ICE Update: US Cocoa Grind Release Link


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                                                     directly impacts cotton or grain is now limited
Weather & Politics                                   to loans, disaster insurance and other direct
                                                     payments.
Living (Standards)             in    a Hen           Brazilian farmers are up in arms about the
House                                                continued untimely rainfall that is delaying
                                                     the sugar harvest and hampering picking of
While several governments have been on the           the coffee crop, which had been forecast to
brink of collapse, the Eurozone almost               be at a record level prior to the poor
splintered and a few more US cities are on           weather. At the same time concerns persist
the verge of bankruptcy, the great debate in         about the late arrival to the Indian monsoon
DC among policy makers is on living                  season which could also reduce sugar and
conditions in a hen house (California                cotton output. With less than favorable
Proposition 2) while midwest farmers are             weather in both top sugar producing
scrambling over commerce laws for shipping           countries, it is certainly understandable why
eggs interstate. The US farm bill is being hotly     the market has seen a recovery from the
debated with the current 5-year program              lows. However, the losses so far may not add
expiring September 30th and essentially every        up to sufficient tonnage to make the market
aspect of the program is up for grabs from           race up too high. A key difference between
food stamps and nutrition guidance to farm           Brazil and India is that Brazil produces
subsidies and insurance payments. Price limits       primarily for export whereas India grows
and controls square off against budget cuts          sugar for domestic use and if there is a
and ways to support the myriad of programs           surplus may choose to export it.
under the existing legislation that is under
close scrutiny because of the debt that has          If the sugar market gains in value too much
been piling up and the ability to fund the           there is a chance that even more of the
farm program versus keeping the new                  Brazilian sugarcane crop will be diverted
policies in compliance with various trade            from ethanol to sugar and that would help to
agreements and the WTO. The landmark frm             offset the lowered yields and keep sugar
legislation cleared the House Ag committee           availability propped up despite the weather
this month and now it up to Republicans to           related problems. Delays in the crop and
not go on summer recess without having at            reduction in yields from this are different than
least a floor debate since time is of the            if the crop was outright destroyed. If the
essence.                                             weather starts to improve hereafter there is a
                                                     possibility that some of the losses could be
One concern for farmers is the reference             made back up. It would see that so far, the
prices in crop insurance title being too low.        delays are causing more of an issue in terms
Cotton is at 68 cents per pound or close to          of the timing of shipments and when the
current market levels, but after the market          sugar will be available rather than the
had been at record highs this past year,             outright reductions in the crop size, although
farmers are hoping for bigger numbers.               certainly there has been some loss. Strong
While there are over 100 amendments being            production views elsewhere and weak
proposed in the farm legislation many of the         demand will also cap the bullishness from the
most contentious issues have been stripped           weather woes.
out of the current farm law because of costs         The coffee market will also remain extremely
to run the various programs being too high           sensitive to developments on the Brazilian
and/or     went     against   policies   both        harvest. Similar to sugar, for now the issue is
domestically and internationally in regards to       one of delays and more so the loss in quality
trade and support such as Step 2 payments            of the coffee rather than the quantity of
to keep US cotton competitively priced with          bags     lost,   although    certainly   some
foreign cotton and inventory protection              downsizing in the estimates may be
certificates.   Most of the language that



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        warranted. Generally at this time of year
        coffee prices fall if the Brazilian winter has
        been frost free, which so far it has. The
                                                                                 Seasonal Swings
        coffee    industry    has   become
        dependent on the better quality Brazilian
                                                 more
                                                                                 and Spreads
        coffees as a substitute for Other Milds,
        especially with the poor Colombian harvests                              Bear Markets or a Bull Move?
        the past several years and limited increases
        in output from Costa Rica, Guatemala, and                                Sometimes it easier than other times to
        El Salvador.      In 2012-13, production is                              determine when a bear market is over and
        expected to improve in Central America                                   the next wave up has some true grit and
        which would help to offset some of the                                   merit and could be called a bull market
        lowered quality from Brazil, but given the                               rather than just a strong corrective bounce in
        magnitude of Brazilian output, it won’t be                               what is still a bearish supply and demand
        enough.                                                                  view. Does having a smaller surplus, but still a
                                                                                 surplus enough of a justification for a market
                                                                                 to turn bullish? Generally not and instead,
Colombian Coffee Output Improved in June                                         more than likely it means that the downside
                                                                                 view needs tempering but supplies should still
                                                                                 be sufficient that a true shortfall won’t exist.
                       1.8
                                                                                 The market rallies up in fear that the weather
                       1.6
                                                                                 problem will persist and production will be
                       1.4                                                       reduced even further but also as a means to
                                                                                 slow demand to prevent future shortages
   millions of bags.




                       1.2
                       1.0                                                       and to encourage expanded production,
                       0.8
                                                                                 but also to drive forward supplies to make
                                                                                 sure that the pipeline is adequately filled.
                       0.6
                       0.4                                                       The softs complex overall continues to have
                       0.2                                                       similar charts with the markets having had a
                       0.0
                                                                                 steep plunge after racing to new highs last
                             88/89 91/92 94/95 97/98 00/01 03/04 06/07 09/10     year and the downside being overextended
                                                                                 when economic worries in Europe seemed to
                                                                                 be at their worst as well as the realization that
Source: FNC
                                                                                 China and others were starting to slow. But
                                                                                 for now, the markets have discounted the
        Colombian       production   prospects     are
                                                                                 catastrophic worst case scenarios of doom
        improving rapidly though. June data showed
                                                                                 and gloom and are recovering from that. I
        a sharp rise from a year ago and now solidly
                                                                                 think this is helping to push all the markets up
        shows that the crop is making a comeback
                                                                                 and for some have had the added benefit of
        with each month’s data showing an
                                                                                 weather concerns.         The markets should
        improvement over last season now on an
                                                                                 continue to collectively rise and fall in
        increasing basis.        No longer would
                                                                                 tandem even though each of the Softs has its
        expectations for the Colombian crop being
                                                                                 own unique fundamentals. What I don’t see
        even less than last season seem valid
                                                                                 is that bounce in prices from the lows has
        especially dire predictions of a total harvest
                                                                                 been because prices had dropped far
        of under 7.0 million bags. The USDA had
                                                                                 enough to stimulate demand or have
        production at 7.5 million and didn’t expect a
                                                                                 farmers make significant purposeful cuts in
        rebound for 2012-13 but it would now seem
                                                                                 acreage or crop care to voluntarily curb
        the tide has finally turned and production
                                                                                 production sufficiently. The reality is that
        could snap back up to 9.0 million bags fairly
        easily.




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demand remains weak and especially so for
cocoa and cotton.                                     European and German Grind Weak


Crop Reports &                                                             360


Other Indicators                                                           310




                                                        thousand tonnes.
                                                                           260

Euro Grind   Weak;                      Cotton                             210
Demand Overstated
                                                                           160
The trouble spot in cocoa is weak demand                                                         Germany
and this is finally starting to be reflected in the                        110
                                                                                                 Pan European excluding Germany
grind data with the European numbers
                                                                            60
coming in well below expectations showing                                        1999   2001   2003   2005   2007   2009   2011
a huge drop from a year ago with a decline
of around 18% and for the first half of the
year European demand is off around 9% as
                                                      Source: Europe Cocoa Federation
the first quarter grind was nearly unchanged.
The slowdown in demand, however, actually                 The ICCO had forecast European Union grind
started in 2011 following a strong first half of          down 15.1% this season compared to a 77.4%
the year. The grind numbers are somewhat                  jump in 2010-11. As much as the market may
exaggerated          because      last    season’s        have been surprised by the grind figures, it
European grind was boosted by the                         really should not cause prices to break hard
uncertain flow of cocoa from the Ivory Coast              and fall below the bottom end of the trading
following an embargo on shipments as a                    range.
means of breaking the deadlock in the
                                                          The June USDA cotton report had United
Presidential stalemate that threatened to
                                                          States domestic use lowered by 100,000
plunge the country into chaos. With last
                                                          bales but exports were revised upward by
year’s second quarter grind strong, weakness
                                                          300,000 to 12.1 million. I still believe this figure
this season seems even more so in
                                                          is far too aggressive given how little cotton
comparison. The weak grind is a reflection,
                                                          has actually been pre-sold already and the
nonetheless, of the troubled economic
                                                          possibility   that    China       will   purchase
conditions in Europe and elsewhere that
                                                          substantially less cotton this coming season
import European chocolates but then also in
                                                          than they did for 2011-12 because their
reaction to the high price for cocoa powder
                                                          strategic reserves have already been built
relative to cocoa butter. Powder ratios have
                                                          up.     Without this strong Chinese buying I
started to soften reflecting the industry being
                                                          don’t see how exports will climb by 500,000
well covered but also a drying up in
                                                          bales since the recessionary concerns that
demand. With no near term prospect of
                                                          are reducing purchases this year will still limit
demand improving from better economic
                                                          demand in the months ahead.                      The
conditions, the only way for the industry to
                                                          economic troubles in Europe have not gone
work them out of a tough position is an
                                                          away and the ripple effect is having some
attempt to curb grind but this then would
                                                          effect in the Asian markets. China and India
elevate powder prices and potentially hurt
                                                          have already been noted for a slowing
consumption. There is also excess capacity
                                                          economy but this week South Korea lowered
and this had propped up grind this year
                                                          their interest rates unexpectedly while
more so than what was really needed by the
                                                          Australia reported a rise in unemployment.
market.
                                                          Lowered prices may help encourage some
                                                          buyers back into the market relative to the




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        pricing at the start of this season when mills
        overpaid for inventory and have been
        working off this higher priced stock, but I
                                                                          Fundamental
        don’t see this renewed interest being
        sufficient to prop up sales too much.
                                                                          Favorite:
        Reductions in the Indian and Pakistani crops
        may also help US export sales but not by                          No Squeeze in Juice
        enough to more than offset the potential for                      There is going to be a watchful eye on storms
        more limited Chinese purchases. The USDA is                       that have potential to strike the Florida citrus
        forecasting Chinese imports to drop to 13.5                       belt and bring damage to the 2012-13 crop
        million bales from 23.25 million this season. It                  now growing on the trees. Hurricanes can
        just seems like a huge stretch to believe that                    damage the fruit and trees directly or the
        other buyers will offset this reduction and                       windy conditions can proliferate the spread
        then buy even more cotton above this and                          of disease, which is a constant threat to the
        that the US will capture a greater market                         States citrus production and has certainly
        share at the same time. Even the USDA data                        been a leading cause for the crops not to
        already shows that the lowered Chinese                            see too much of a recovery.
        purchases won’t be offset with imports by
        countries other than China only expected to                       Aside from being in a heightened state of
        increase by just over three million bales,                        alert from being in the hurricane season,
        leaving a gap of around seven million. So                         traders will also be shifting their attention to
        how could US exports be even stronger next                        preliminary views on the size of the next crop.
        season?                                                           The potential size of the crop based on the
                                                                          current tree population and ideal weather is
                                                                          still remarkably large, but in recent years the
Chinese Output VS Use                                                     box count per tree has fallen shy of this due
                                                                          to either above normal levels of fruit drop or
                                                                          the oranges not sizing well resulting in more
                 52
                                                                          pieces of fruit needed to fill each 90-pound
                 47            output                                     crate.     A conservative view of the crop’s
                 42            Use                                        growth potential would be the most prudent
                                                                          approach to forecasting the next crop. It is
 million bales




                 37

                 32                                                       possible that the cold snap this past winter,
                                                                          while it did not cause much harm to 2011-12
                 27
                                                                          production may have in some way hurt the
                 22
                                                                          blossoming and development for the next
                 17                                                       harvest even though so far it doesn’t seem to
                 12                                                       be a major point of discussion.
                      82/83 86/87 90/91 94/95 98/99 02/03 06/07 10/11
                                                                          The market may rally in advance of private
                                                                          estimates and then sag if they project higher
Source: USDA                                                              than expected output but then the market
                                                                          may have an entirely different reaction in
                                                                          October when the first USDA figure is
                                                                          released. I would expect the futures market
                                                                          to lack clear direction in the next few months
                                                                          and become more erratic swinging in a wide
                                                                          trading band until a better crop view
                                                                          emerges. Rallies, however, should provide
                                                                          easy selling opportunities.




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ICE Update:                                          About J Ganes Consulting
                                                     Food and agricultural businesses can rely on
NCA to Release Cocoa Grind Report on July            the pertinent research, expert analysis, and
19, 2012                                             historical perspective of J. Ganes Consulting,
                                                     LLC. Our market reports, customized
The Second Quarter 2012 Cocoa Grindings              research, consulting services, and workshops
report is scheduled to be released by the            offer insight, on-target forecasting, and
National Confectioners Association (NCA) at          objective thinking.
4:00 pm ET on Thursday, July 19, 2012. Once
it is released by NCA, the report is available       We filter and synthesize supply-and-demand
using the following link at the Cocoa page of        information drawn from critical industry
ICE         Futures        U.S.       website:       publications and our personal contacts in the
https://www.theice.com/publicdocs/futures_us_        field; we interpret that information; and we
reports/cocoa/Cocoa_Grinds.pdf                       put it in a context to support your business.
                                                     Visit www.jganesconsulting.com for a two
Until the new Report is released by NCA and          week free trial to other reports available by
posted, the link will take users to the most         subscription or to learn of other consulting
recent report, the First Quarter Report that was     services available including workshops or
released in April 2012.                              private training on risk management and the
                                                     use of futures and options that can be given
The full exchange notice can be                      worldwide.
viewed                           at
                                                     About ICE Futures U.S.
https://www.theice.com/publicdocs/
futures_us/exchange_notices/071220                   This newsletter is brought to you compliments
                                                     of ICE Futures U.S. Some helpful links about
12cocoagrindDate.pdf                                 soft commodities at ICE Futures are:
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                                                              Sugar No. 11
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                                                     to ICE Futures U.S. The views and opinions offered in this
                                                     report are solely those of J. Ganes Consulting, LLC. ICE
                                                     has not verified the information presented, and makes
                                                     no representation about its accuracy or completeness.
                                                     The views in the report are not necessarily those of
                                                     IntercontinentalExchange or ICE Futures U.S. and cannot
                                                     be the basis for any claim against them. Futures and
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