HardAssetsInvestor

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, today we have a floor trader – yes, you don’t find them too often – Jurgens Bauer of PitGuru.com and soft commodity analyst from the Intercontinental Exchange.

Jurgens, thanks very much for coming by; really, it’s great. Like I said, you’re sort of an anachronism, and you and I go back. We know each other from the days of the COMEX and the NYMEX back in the ’80s, so it’s great to see you again; I haven’t seen you in a long time.
It’s great to have you here because you cover an area … the soft commodity area – we’re talking about coffee, sugar, cocoa, orange juice, cotton … really a specialized focus there. First, I’m very curious to find out: What’s it like down on the floor? Everything is electronic nowadays.

Jurgens Bauer, PitGuru.com/soft commodity analyst, Intercontinental Exchange (Bauer): Well, it’s a lot different from the old days; the futures pits are electronic. I’ve always been an options guy, and one of the things that’s still available for floor traders is the option markets, so we still have pits.

Norman: Why is that? Is that because the options are just such a specialized thing that you really need to have a human, somebody in there to work with?

Bauer: Don’t I wish. I think probably a better answer to is that the information flow that has to go back and forth every time there’s a minute change in the price … when you’re talking about not just hundreds of options … then you’ve got the multiple combinations of this option against that option, this spread against this spread, you’ve got fences and straddles and strangles and all this stuff, and there’s too much information.

Norman: It’s not a plain-vanilla type of purchase … a futures contract, short a futures contract.

Bauer: If one of the exchanges has come up with a successful option platform which could be then utilized to transact business, I wouldn’t be doing what I’m doing on the trading floor. Currently that doesn’t exist. That’s not to say that it won’t happen at some point, but it just doesn’t exist. And for now I think the window of opportunity, shall we say, is going to continue for at least another three, maybe seven more years.

Norman: All right. Let’s talk about your markets. You are the soft analyst for Pit Guru, and we’ve seen recently again some of these markets really start to perk up. What is behind this? It’s sort of a curious thing to watch, because you look at economic activity here in the United States, around the world – still very tepid, very weak. Why are these commodity prices rising? Is there a fundamental reason behind this, or is it again fund speculation?

Bauer: It’s a good question. I would have to answer that by looking at each individual market, and I can provide you with fundamental reasons, for instance, for sugar.

Norman: Let’s go; let’s run them down.

Bauer: Sugar price has gone up because the production on a world scale is lower, and consumption is certainly going to remain the same if not go up – increase as populations increase, and diets go up, diets improve. So I would have to say there’s a powerful fundamental force at work.

Norman: Is sugar also involved in this alternative energy theme, because don’t they use sugar in Brazil for the making of ethanol?

Bauer: Yes; in Brazil they do. In this country, we’ve been … how do I say this politically correct now … we use corn, OK? My understanding is it’s less efficient and more costly than it would be from sugar. Yes; so that force is at work as well.

In cotton, we had pretty good exports going, we had much-reduced crop size, not only in this country but tapered off around the world.

Norman: Is that because when we had the boom in the commodities like corn and wheat and soybeans two years ago, cotton acreage was reduced so that farmers used it to plant the more-lucrative crops?

Bauer: Sure, right. Not only that, you had … so those are markets … in coffee – right now my personal favorite market.