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-Chad Butler

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January 10, 2007

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Get your complimentary 2007 Commodity Trading Guide and get access to the following:

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  • All-Time Contract Highs and Lows
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About the Author

2007 Commodity Market Outlook - The Bull Continues
By Chad Butler, RJOFutures

As we enter a new year, one of the first things I try to do is evaluate markets and develop a picture of what to expect in 2007, both in terms of fundamentals and technicals. This gives me some idea of what my trading plan will be for the year, what markets to focus on, and where the action is likely to be. Like any trading plan, this yearly evaluation must remain flexible. Weather, geo-political events, natural disasters, and even bumper crops can all be unpredictable. Situations change and any trading plan must be able to change with the environment. With that in mind, I would like to share some of what I will be watching for in the coming year.

Grains

The grain markets continue to be on everyone's mind. Will we see record high prices? How high can corn go? What will be the effect of the food vs. fuel debate? These are just some of the questions on everyone's mind, and there is no exact answer. But the grain complex will most likely be the star player of 2007.

We have the makings of "The Perfect Storm" in the grain complex for 2007 -- global demand, an El Nino year, falling stocks and stock to usage ratios, and there are just only so many acres of cropland available to fill demand. Corn is the current popular player in the unfolding ethanol story and this will likely continue during 2007. Higher prices as a result of increasing demand for ethanol production could be assisted by a continued El Nino weather pattern into 2007.

With corn pushing closer to record prices, there is a fear that acres of soybeans will be lost to corn. This supply concern has pushed current bean prices higher, in light of the fact that we have record supply. This will be an area to be cautious in as the technical and fundamental picture of the market are currently in opposition. In the Soybean complex, bean oil has the advantage of being in demand for bio-diesel. As for bean meal, the supply picture in beans will likely weigh on meal.

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Energies

It is often said that the cure for high prices is high prices. Nowhere has that truth played out better in 2006 than the energy market. When open markets are allowed to work, high prices become a damper on demand. We have seen crude oil prices plummet from record highs and the technical picture remains bearish.

Does that mean the bull run in crude is over? Well, I would not go that far. There are a number of fundamental factors that could turn this market higher again. Demand is increasing faster than production. Additionally, global production tends to be most prevalent in areas that are politically unstable.

The current weather pattern continues to play a role in the energy markets as well. As we wrote in 2006, the winter El Nino weather pattern would be not only bullish for grains but bearish for energies. This continues to play out in the winter of 2007. As the US experiences generally mild winter weather, the demand for heating oil and natural gas is reduced. However, the market will digest this later in the year and look forward to the winter weather of 2007-08. Given the current supply picture, heating oil and possibly natural gas could see a return to bull markets if the weather cooperates.

Metals

After stellar bull runs, both gold and silver turned in pretty disappointing performance in the latter half of 2006. With that in mind, could we see the bulls return in 2007? I think that is a strong possibility. To start with, on the technical side, markets do not just travel in a vertical trajectory. They must pause to "take a breather" and consolidate gains. Viewing a longer term chart of gold and silver shows that is what was occurring during 2006.

2007 could be the start of the next leg up. Looking at the market fundamentals, central banks seem to be winding down their sales of gold. Additionally, 2007 food price inflation as a result of the previously mentioned grain/ethanol/energy picture could join the inflation we have already experienced in energies. Should this happen, I would expect higher prices in both gold and silver.

Alternatively, copper prices may not see continued high prices. Housing demand, auto demand, and Asian expansion seem to be slowing down to a more reasonable pace. The run during 2006 was certainly built on supply concerns, but that may not continue into 2007. But there is always a situation of "on the other hand," so copper may be a market to watch from the sidelines.

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Softs

Sugar was certainly driven to record prices on the ethanol train. However, production was able to step up to meet that demand and we saw a significant consolidation of prices. 2007 may see a return to the bull camp as consumption continues to increase.

Cocoa is another one of those products that tends to come from politically unstable areas of the world. Fundamentally we are seeing the possibility of higher prices in 2007 and if the technicals come in line to support that, this may be a market to participate in.

Coffee on the other hand is a mixed bag. The fundamentals in some areas suggest higher prices -- Vietnam and Sumatra for example. But the South American crops are doing well. The sidelines may be the place to be for coffee as there is too much fundamental and technical opposition.

This information should give you some markets to keep an eye on for the coming year as well as some to avoid. Unfortunately, time and space do not permit an in depth consideration at this point. We could easily write a dissertation on each of the markets mentioned. For more in depth analysis of each of these, and other, markets I suggest the 2007 Commodity Trading Guide . RJOFutures is giving it away this week to readers of Fast Break. The Guide is loaded with in depth analysis, fundamental and technical information, and price outlooks for major commodity markets. It is an indispensable tool for every trader.

Additionally, our experienced strategists can assist you in developing a trading plan for any of these opportunities, be it based on technical or fundamental analysis.

As I have written many times before, the commodity bull market is set to continue. Remember, not all markets go straight up, and not all markets participate at the same time. Be sure you are in the right market for your plan.

THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER TRADING FUTURES AND OPTIONS FITS WITH YOUR INVESTMENT OBJECTIVES.

About the Author
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Chad Butler is a Senior Market Strategist with RJOFutures, a division of R.J. O'Brien. His 16 years of market experience includes option spread trading, diversified trend following, and development of a number of index arbitrage programs. Chad's published work appears in McGraw-Hill's Complete Guide to Single Stock Futures, Futures Magazine, and other trade publications. He currently writes for various commodities newsletters, including RJOFutures MarketNews and has been a featured seminar speaker teaching his various trading techniques to audiences large and small.

Special Message from Our Author
----------

Get your complimentary 2007 Commodity Trading Guide and get access to the following:

  • Implied Volatility Studies
  • Exclusive Fundamental and Price Charts
  • Ten Years of Supply and Demand Tables
  • All-Time Contract Highs and Lows
  • Government & Industry Report Dates
  • Over 350 Charts & Graphs
  • Fundamental Outlooks
  • And MORE!

This $20 value is available COMPLIMENTARY.

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FutureSource.com: Fast Break for Traders

Disclaimer:The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.