June 22, 2006

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Today's Questions:

We had some great questions come in and I am excited to get to the answers. Before we get started, let me say that everything right now hinges on supply and demand in the markets. And the current fundamentals say that there is more demand than supply. My weekly column in the RJOFutures Market Newsletter covers this fact on a regular basis and I would encourage you to sign up for this complimentary service. With that said, let's get to the questions!

What do you think the next couple of years will hold for world energy prices? - Bill in Orlando

Foreseeing hurricanes, OPEC reductions, and just using a non-happenstance figure, I believe crude will stay high due to high consumption ratios going out to 2009. This is the basis of the current DOE projections. Additionally, the bullish crude oil outlook by DOE needs to be considered as an ideal case scenario based on consumption. In other words, the market is bullish based solely on future consumption (supply/demand) and doesn't consider and geopolitical upheaval such as a nuclear stand-off with Iran or North Korea, a large terrorist attack (specifically energy related), or any other similar situation. Simply put, the energy market is bullish for the foreseeable future.

What do you see as the next phase in alternative energy due to current high prices of fossil fuels? - Steve in Chicago

Currently I believe that sugar, corn, and bean oil will be the frontrunners in alternative energy. I recently published an article for the June issue of Futures Magazine outlining the world consumption of energy and a move towards bio-fuels, i.e. ethanol, where I discussed the future of bio-fuels and what it will mean to us commodity traders in terms of market conditions for the next few years.

One market in particular that is being driven by the demand for bio-fuels is sugar. I get a lot of questions on this market and I still believe it is a strong alterative to fossil fuels. Currently, Brazil is planting 2.5 million acres of sugar with the help of its army and it intends to have this done by 2009 with crush beginning in mid 2009. Additionally, it is my belief that the new Australian bio-tech sugar cane which has just been engineered by Bio Industries is miles ahead of anyone in the industry today. This newly engineered plant, Cellulosic Ethanol, is designed to be converted into ethanol and the by-product is converted into feed & sweeteners, thus giving higher overall crop yields. In the future, this development will give sugar an edge over corn and bean oil as used for ethanol.

What is the story on the new bio-diesel fuel? - Barb in San Diego
What are your short-term and long-term thoughts about the corn futures market? - E in Florida

I'm combining two related questions here because they are tied together so nicely.

Bio-diesel is truly one of the best fuels we could use for a myriad of reasons. First and foremost, bio-diesel reduces carbon emissions by 80%. It also produces 100% less sulfur dioxide than petroleum based engines and reduces exhaust smoke particulate matter by 75%. Taking this all into account, and the idea that at the end of the day we are keeping our farmers working and making our nation strong, this is truly one of the best alternatives that truckers have today.

So from a trading perspective, will corn be able to supply America with enough ethanol for the future and is corn a good buy in the commodities market due to the new push into ethanol? Simple arithmetic by using current converting methods for producing corn into ethanol, taking into account by-product and energy required in the conversion process, the absolute best we can do is 10 - 15% of the current demand for automotive fuel additive.

What this means in the future is that the overall complexion of commodities as we know them today, with our giant crop production overages of corn, is that in the next few years these crop overages will disappear due ethanol demand in the future. As a trader, this translates to the fact that the once $1.89 - $2.25 range in corn will be a thing of the past. Opportunities to buy corn, sugar, and bean oil could prove to be a very good trade.

Here is your chance to receive market commentary, trade recommendations, and trading strategies from the pros at RJOFutures with a complimentary subscription to RJOFutures MarketNews. MarketNews includes regular weekly commentary, market outlooks, trade recommendations and other strategy based articles. As a bonus to FastBreak readers, you will receive an introduction to trading futures, access to our learning center, and special market reports.

Sign up today to begin receiving RJOFutures MarketNews and to receive the additional bonus offers!

I am primarily an S&P and currency trader. Recently, with all of the hype over China, energy, gold, and raw materials prices in general, I had been considering expanding into commodities as it looked like there was good opportunity. Now, it appears that the bubble has burst. Do you feel this is the case? What do you think the outlook is for commodities over the coming months and years? - Mike in CA

Well, first, I do not believe that "the bubble has burst." There is no reason to believe that global demand driving the prices of raw material and energy (and ultimately the commodity markets) will subside.

What must be taken into consideration is the tightening effect and the effect it will have on commodities not only today, but over the next five years. The tightening effect is that the US does not have any spare crude oil. Brazil is expected to increase its homeland usage of ethanol 10% per year for the next three years which will take ethanol off the market. That, coupled with Chinese demand and India coming to the table for the first time with demand for crude, we expect an inelastic market to be at its peak.

Subsequently, oil products such as bean oil, corn, and sugar will be in tremendous demand, not just for food but for fuel. Insofar as the "commodity bubble" bursting, this is nothing more than a dip to buy in markets like the grains, certainly in the energies, and of course sugar. Remember, a bull market does not mean everything only goes up all at the same time. There will be ebbs and flows. That is why it is critical to have a plan and stick to it.

In spite of the Coffee Market so evenly balanced between demand and supply and a very low level of stocks in major producing and consuming countries - why is it that the market is at nine month lows. Where do you see the market position during the next one to two months? All of the last 3 months most analysts and market operators were all of the opinion the market would be around 130 to 140 cents but here we are at 97 cents now. What do you think will happen in the next month or so? - Faiz from India

The Coffee market is an international market. For some odd reason, people seem to think coffee only comes out of Columbia. But some of the world's best high quality coffee beans are coming out of Vietnam and production in that country is very plentiful. The last three crops from Vietnam have been the best they've every produced. I truly see no change in that region's fundamentals. They are just plain good farmers and they will continue to market their product aggressively.

The coffee play, if you have risk capital, is to buy September coffee at the end of June and maintain right up to the delivery date with the idea of a freak freeze or heavy rains in Columbia. This is their winter period and usually about every seven years they will have a some freakish occurrence of weather. This trade is swinging for the fences with the bases loaded. It's either over the fence and you bring it home or you are going to lose it all - there is no in-between on this trade so you have to have risk capital to trade it. Incidentally, I would not have this on as my only trade. This should be done in conjunction with a sound trading plan.

Is the dry weather in West Texas going to effect the price on Dec. cotton. Locally the dry land cotton is either gone or will be in the next few days. What is you outlook for cotton? - Jon in Lubbock Texas

We are now in the critical time for cotton in Texas. I'm definitely not bullish on the crop yet, but I could be soon. The thing that has caught my interest is demand is strong (China has been a big importer) and Australia's crops have been poor. If Texas does come in weak, we will be keeping our eyes on Egypt. We feel we could see a good rally in the Cotton. But as of yet, it needs to build its base and if you are looking for an entry point, I would be buying dips and using risk equity as my stop point vs. technical support points due to the fact that you are trading weather now as opposed to technicals.

Well, I appreciate the questions we received. Unfortunately, I was not able to answer every question but I tried to cover some of the primary themes we saw in what we received. It is my opinion that the bull market is just beginning to get started. There are sound fundamentals out there that are going to drive the bullish supply/demand picture. Have a sound trading plan in place before you get started as you will need to be able to ride out the dips like we are experiencing now. As I mentioned, if you want to follow these markets, you can follow my column in RJOFutures MarketNews complimentary every week.

And never let a winner turn into a loser!

-Pete Thomas

Here is your chance to receive market commentary, trade recommendations, and trading strategies from the pros at RJOFutures with a complimentary subscription to RJOFutures MarketNews. MarketNews includes regular weekly commentary, market outlooks, trade recommendations and other strategy based articles. As a bonus to FastBreak readers, you will receive an introduction to trading futures, access to our learning center, and special market reports.

Sign up today to begin receiving RJOFutures MarketNews and to receive the additional bonus offers!