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WHAT’S AHEAD? Weather & Politics: Deforestation Creating Climate Change

Seasonal Swings and Spreads: Commodity Index Reweighting

Market Sentiment & Other Indicators: Cocoa Meltdown, Sugar Sinks

Fundamental Favorites: Cotton Picking

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Price Forecasts and Trading Ranges are Available in Paid Subscriber Reports

SOFTS: Fast Facts—November 2014

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Weather & Politics Deforestation Creating Climate

Change

There has always been a struggle between

protecting one’s environment and the need

for development. After all the Industrial

Revolution was a period of economic growth

spurred by factories lining the shores of rivers

and oftentimes toxic waste being dumped

into them and killing the fish and fauna

within. Natural resources were being

depleted at alarming rates and the

ecological balance was being destroyed

from excessive logging and deforestation for

development to pave way for rising

populations and needing to grow agriculture

and commercial enterprises. According to

the World Preservation Foundation has

compiled data on the global overview. They

state that the The statistics of deforestation

reveal that seven countries of the world

amount to around 60 percent of the total

deforestation on the planet. These seven

countries include Brazil in Latin America,

Canada and the United States in North

America, Indonesia and China in Asia, Russia

in Europe and the Democratic Republic of

Congo in Africa.

According to data compiled by the World

Resources Institute the planet has already lost

80 percent of its forest cover to deforestation

and they fear it won’t take much time for

that figure to reach the 100 percent mark if

the present rate continues. Considering the

impact on specific commodities West Africa

which previously boasted of lush green

tropical forests in the 19th century, has been

stripped of 90 percent of its forest cover over

the last century while the world is highly

dependent on cocoa production from this

region. They also note that same trend of

deforestation continues in the two remaining

rainforest biomes in South America and Asia

respectively, which also would impact cocoa

production as well as all other softs.

Today agriculture is the leading cause of

deforestation with 46% of the total linked to

subsistence farming while commercial

agriculture is responsible for 32 percent.

While in some countries it is declared illegal

and the government is trying to prevent this,

oftentimes a blind eye is taken and the land

is not reclaimed. This is believed to be

ongoing in Vietnam and has aided the

expansion of the land planted to coffee.

While it may help to boost production in the

short term, the detrimental effect on the

planet and effects on the climate in the

specific region could hurt productivity on a

greater area than that which was deforested

to boost output. The short term impact VS

the longer term effect are not immediately

evident.

However, this past year the effect from

climate change was suddenly very clear and

jumped to headline news because millions

were being impacted by water shortages in

Brazil that were unprecedented with the

main reservoirs being nearly depleted and

spring rains may have come just in time to

avert a national emergency. The Amazon

Basin is reported to have the highest rate of

deforestation than in any other part of the

planet. The Amazon rainforest covers

approximately 2,488,642 square miles and in

the past four decades has, lost nearly 20% of

its forest cover. Brazil alone accounts 33% of

the remaining rainforests of the world and,

has been experiencing an average loss of

21,536 square miles of forest cover annually in

recent years. While it may seem insignificant

because it is less than 1% of the total forest

cover of the country its role in climate

change is far greater. Small changes make

a huge difference in precipitation levels.

About 65% of the deforestation in the

Amazon is linked to cattle ranches and the

remainder from small-scale subsistence

agriculture, which is often on illegal plots of

land and more difficult to control.

Recent statistics have painted a grim reality.

Brazil reported that the rate of deforestation

in the Amazon increased by 28% between

August 2012 and last July, after years of

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decline and while the government may be

working to reverse this “crime”,

environmental activists blame the increase in

destruction on a controversial reform to

Brazil's forest protection law and see that

deforestation may be on the rise again with

logging now a leading cause rather than

agriculture. The changes reduced protected

areas in farms and declared an amnesty for

areas destroyed before 2008. The Brazilian

government made a commitment in 2009 to

reduce deforestation in the Amazon by 80%

by the year 2020, in relation to the average

between 1996 and 2005.

Until recently one of the key focuses

stemming from the effects of deforestation

was on the negative effects on the climate

with a noted link between greenhouse gas

emissions and global warming. The Amazon

Rainforest has been described as the "Lungs

of our Planet" by continuously recycling

carbon dioxide into oxygen. More than 20

percent of the world oxygen is produced in

the Amazon Rainforest, but now it is clearer

that the domino effect of deforestation is

even greater and there is detrimental effect

on rainfall patterns giving it an even wider

role in climate change.

The Amazon has been called a River in the

Sky because of the vast quantities of

moisture that would be produced from the

tropical forest and it has helped make Brazil

the bread basket that it is now as a leading

provider of commodities, but also helps to fill

the vast reservoir systems that support cities

such as Sao Paulo public water and

hydroelectric power. Deforestation is now

being blamed for turning off this natural

water spigot and drying out areas that

previously received the beneficial rains in

abundance. There is concern that the

drought conditions that have occurred

through much of this year will no longer be a

once in a century occurrence but happen

with increased frequency and intensity

rendering what was suitable agricultural land

for some commodities no longer a viable

alternative in vast tracks of area. Those

researching the effect of this climate change

on coffee and to some extent sugar fear this

disruption to the rain cycle could shrink the

area available for coffee production and

eventually wipe out what is now considered

the heart of the coffee belt in the state of

Minas Gerais especially. It will be up to the

government to push to protect the Amazon

and try to restore the balance to avoid this

occurrence but there is great concern that

measures in place are not yet sufficient to do

this and the push for more and more

agricultural uses is posing a longer term

threat to the very farmers that are benefitting

from the ongoing deforestation.

Up to thirty percent of the rain that falls in

tropical forests is water that the rainforest has

recycled into the atmosphere. Water

evaporates from the soil and vegetation,

condenses into clouds, and falls again as rain

in a perpetual self-watering cycle. In addition

to maintaining tropical rainfall, the

evaporation cools the Earth’s surface. In

many computer models of future climate,

replacing tropical forests with a landscape of

pasture and crops creates a drier, hotter

climate in the tropics. Some models also

predict that tropical deforestation will disrupt

rainfall pattern far outside the tropics,

including China, northern Mexico, and the

south-central United States.

However, NASA Earth Observatory refutes

some of these claims and notes that most of

these climate predictions of decreased

rainfall are based on a uniform and virtually

complete replacement of tropical forests

with pasture and cropland. But, the reality is

very different and the losses do not happen

in a uniform manner but what they describe

as in patchwork fashion creating deforested

islands within a sea of forest. What they

observe is the opposite effect where

deforestation may actually increase rainfall

by creating “heat islands” that enhance the

rising and overturning of air (convection) that

leads to clouds and rain on the cleared air

making it more suitable for agriculture. As

these patchwork islands merge, then a

drying out could occur.

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Rain has started to fall in the Brazilian coffee

areas and in the southernmost areas the

flowering is reported to be good with rains

coming just in time. However, in other areas

the water deficits continued through

October and into early November and with

the trees stressed already it remains to be

seen how well they will flower but also more

importantly set the fruit. It also may be

jumping the gun to assume that because the

trees flowered that this marks the end to the

problems. It is a hopeful sign, but one that

many agronomists and farmers believe could

be a false reading and the cherry set may

not be as bountiful as the flowering is. One

strike after another has occurred this year

that have led to downgrading in the crop

potential which already should have been

pared being the cyclical off year in the

production cycle. Drought in January and

February limited the vegetative growth on

the trees and it is in this reduced area where

new flowering only can occur. Some trees

already suffered from aborted flowerings and

also heavy defoliation from ongoing

cumulative moisture deficits and previous

searing heat that lasted into October. In

these areas, mostly in Minas Gerais, the losses

to the crop are irreversible despite the rains

that are now in the forecast. The rain will

provide soil moisture relief and prevent even

greater losses, but the crop will never reach

its fullest potential with some estimates by

agronomists putting the losses upwards of

30%.

Brazil is not out of the woods yet. Although

heavy rains fell the soil being rock hard is not

able to easily absorb this. The water levels in

the reservoir remain dangerously low and

some experts believe it could take as much

as five years to normalize if there is a return

during this time to regular rainfall patterns.

Climatologists are not sure if this will happen.

The adjoining graphic shows the seriousness

of the conditions in the Brazilian water

system. The water that is remaining in the

main reservoir is considered “dead” water. It

is from levels well below the surface

essentially blasted out of the ground. Without

this, the reservoir would be down to only 1.6%

of capacity. The rains that fell were

insufficient to replenish the water table.

Brazilian 2015-16 Arabica Production Very Uncertain

Source: USDA

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Seasonal Swings

and Spreads Commodity Index Reweighting

It’s that time of year again. Heathrow airport

is decked out in purple and silver trimmings,

retailers are already hawking pre-Black Friday

sales to get people in the holiday shopping

spirit as early as possible and commodity

traders are focusing on the reweighting of

Commodity Indices and speculating and

posturing ahead of this well in advance and

guessing on the likely market impacts. With

coffee prices up considerably from last year,

it lights as bright as Rudolph’s red nose with

the chorus of can’t you see that slide

tonight? Estimates are the reweighting could

cause the liquidation of about 15,000 lots.

While the signal may be to sell, my

fundamental perspective is that this will be a

clear case of sell the rumor, and buy the fact

once the ball drops, providing an interesting

opportunity to start the New Year off with a

bang. The past three spike moves in coffee

all started in January and lasted past the first

quarter. By January there will be a much

better reading on the crop prospects in

Brazil. The trees will have flowered and

estimates on the crop will be based on

actual conditions rather than by educated

guesses and/or conjecture. The trees will

speak for themselves by then. Brazilian

producers have already reduced the volume

of their selling below exporters needs and this

will be more acutely felt or noticed by the

market at that point with shipments trailing

off. Consumer stocks should start to recede

after being built up reflecting the lowered

volumes after a flood of shipments from 2013-

14 and earlier crop coffees.

The coffee market also seems to be acting

on the premise that all is jolly well in Brazil with

the rains alleviating the drought conditions.

But as noted previously, the situation has

been unprecedented and so the true effects

remain to be seen. Coffee trees tend to be

hardy and make strong comebacks but

there are limits to this and certainly this will be

a test to see by just how much.

Long Coffee Positions May Need to be Ditched

Prematurely on Index Reweighting

Source: CFTC, ICE

The FCOJ market has continued to trek lower

on liquidation pressure as signals for the

Florida orange crop have improved and rains

have fallen over Sao Paulo. The hurricane

season ended in a whimper and it is still too

soon to realistically talk about the chance of

a freeze in Florida this coming winter. The

lackluster economy in Europe is not helping

either as this is the largest market for Brazilian

product.

Consumer demand remains poor and

continues to get worse driven by high prices

and a plethora of other healthful beverage

options that are replacing single flavor

orange juice for blended offerings or other

juices, teas, fruit smoothies and a wider

variety of coffees as well as yogurt based

drinks. Even at one point soft drinks

competed against orange juice at breakfast

particularly in office environments.

The market should hit bottom soon and see a

seasonal upswing with speculators typically

averse to getting short this market.

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Market Sentiment &

Other Indicators Cocoa Meltdown; Sugar Sinks

It looks like support has finally been knocked

out of the cocoa market. It has been long

overdue and the market for one reason after

the next the past year had cause to shake

off otherwise seemingly negative

fundamentals. Prospects for a big deficit

that never materialized and then fears of an

El Niño kept the market in an uptrend. Then

there were renewed fears of weather

problems or disease threats and then then

worries that while 2013-14 proved to be a

surplus year rather than a shortfall that 2014-

15 would return to a deficit with high hopes

for demand in emerging nations and in Asia

in particular to push global grindings higher

and higher. None of this has happened.

Grindings are likely to continue to be

disappointing due to the very high price of

cocoa butter and cheap prices of cocoa

powder. This ratio spread has never stayed

out of alignment indefinitely and I don’t see

the major paradigm shift to suggest

otherwise that many have been anticipating

or actually actively occurring.

High prices and shaky economics are not a

winning combination for the cocoa market

and this is taking the wind out of the bull sails.

The market had also raced up on fears of

supply shortages if Ebola is found in the Ivory

Coast but so far this has not happened and

by example of Nigeria, it is possible to

contain an outbreak in a West African

country with the right medical training and

preparedness which seems to be the case in

the Ivory Coast which is on high alert for

monitoring against it. An easing in the

number of new cases in neighboring Liberia

also is taking some of the angst off the

market which had previously run-up on

expecting a full blown disaster to occur.

Clearly if circumstances change the market

may run up again, but for the time being the

fears were overdone and buyers had even

front loaded some shipments in

preparedness of a disaster that hasn’t

happened. This will leave the market with a

dearth in demand later this season.

A weak El Niño is possible but also not likely to

bring any detrimental effect to cocoa

production. Prospects for 2014-15 production

are now positive with favorable weather and

strong prices at the farm.

The sugar market has lost gas as the Brazilian

real weakened and uncertainty about

gasoline prices have led to market declines

on the idea that low gas prices will reduce

ethanol use and more of the sugarcane will

become available for processing into sugar

over fuel use. This may be true, but it is

already late in the season and much of the

main crop production from the key

center/south region is already cut and

processed. Remaining 2014-15 is limited in

comparison. It is too soon to say what the

prospects will be for 2015-16 in terms of the

volume being used for ethanol. It may

indeed be greater but also potentially offset

by lowered yields due to the drought and

inability of farmers to replant cane in a timely

manner. The market is already digging into

levels where the inducement to ramp up

sugar production has disappeared and this

could cause a slowdown in future growth as

well. The market is already reflecting big

crops for 2014-15 and will soon start to turn

attention to 2015-16 prospects and early

optimism for the string of surpluses to end.

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Cocoa Finally Dropping on Weak Demand, Easing

Fears of Ebola and El Niño

Source: FutureSource

Fundamental

Favorite Cotton Picking

The cotton market continues to show

sideways to lower trading range with little

cause to break out of this range—either up or

down at this time. The market is still wedged

between two very opposing fundamental

views depending on whether one believes

China will unload large volumes of cotton or

not from their massive stockpile and the

market has been waiting what seems like an

eternity for the proverbial other shoe to drop

but so far it hasn’t. China instead has still

been nibbling at the market taking small

quantities week after week.

After falling as hard as it has and continually

waiting for some Chinese shocker to make

the market freefall, it just isn’t happening yet

and it could be yet another season where

the market hangs in limbo waiting for

direction out of China and none comes. The

lowering of Chinese support prices and the

end to piling up even more cotton in stocks

has knocked the market down about 15

cents from last season but then similarly has

gone sideways. Nothing has really changed

except the lowering of the range the market

is now stuck in. Seasonally the market is right

on target for making a bottom and with

perhaps the lateness of the US crop this is

being helped along particularly since

carryover stocks from 2013-14 were limited

and that supply needed to be stretched that

much more. It is not enough to hold bulls

attention anymore but certainly isn’t a

depressing factor.

When the market is looking for answers as to

which direction the breakout will be, I still

think the movement will be higher not lower.

Current prices are low enough to keep mill

interest sustained and discourage plantings

next spring. The market will start to hone in

on this soon now that the end of the year is

approaching. But it is also in what has not

been said as I’ve pointed out numerous

times—China has indicated that they would

stop increasing supplies and offering direct

subsidies but they never said they would sell

off large volumes of cotton and release the

mountain of stocks they accumulated. It

seems that China is going to work them off

methodically without disruption to the market

as Chinese production falls and mill interest

picks up and the deficit will get fed by a

combination of domestic cotton and imports

be it raw cotton or yarn, with the latter the

more likely since China has already pledged

to keep raw cotton imports at only minimal

mandatory amounts by the WTO.

Given this is the season that exports were

supposed to plummet and the roof cave in

on the market, the export sales data is

holding up relatively well. Commitments

after 13 weeks are running slightly better than

last year although shipments are sluggish.

This has to do with low carryover and the

lateness of the crop and there is still plenty of

time for exports to trend up and even

exceed year ago levels.

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About J Ganes Consulting

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