Last week’s lower max temperatures combined with cooler evening temperatures resulted in a light week for US cooling demand. The US population weighted number for the week ending 16 Aug was 54 CDDs, which is -15 vs. normal and -33 vs. last year (same week). More important than the overall US number is the regional breakdown; the weekly CDDs vs. normal were -21 for New England, -29 for the Mid-Atlantic, -35 for the East/North-Central states and -24 for the West/North-Central States (-9, -28, -53 and -59 vs. LY, respectively). The only US region to experience above normal cooling demand last week was the Northwest. The current week will see a shift to higher demand in the central and eastern states, as a high pressure system brings warmer temperatures to the northern tier of the country for the next 3-4 days. However, this warming looks to be short lived as next week’s pattern looks to be similar to the one that we saw last week, with most of the cooling demand restricted to the western US. We should note that from an energy demand perspective, the Weather Trends temperature outlook for much of the US has verified this summer, and demand expectations which we generated last year are on target to support the seasonal CDD profile.  In the tropics, Tropical Storm Fay is closely following the track that was issued by the National Hurricane Center, and is now over land in southern Florida, moving NNE at approximately 9 mph. TS Fay has posed no threat to rigs, and crude subsequently continued its’ decline as it dropped for the fourth straight session. Most estimates are in agreement that crude inventories rose last week (verification pending), as benign weather allowed for arrivals to pick up. Other than Fay, the rest of the Gulf and the Caribbean is pretty quiet. There is currently a system in the central Atlantic that we are monitoring for development; warmer ocean temperatures and an increase in convection over the last 36 hours serve as positive factors, but the upper air pattern as of this morning is uncertain.

OCT08 (ICE) world sugar has traded in a tighter range this week, and activity through Wednesday looks to support more of this rangebound pattern. Brazil’s sugar production is behind last year’s pace for early August, but we do not have any serious concerns for the Centre-South crop, and the gap should be closed by the end of the month. The market has reacted to circulating news that Brazil’s sugar production will be lower, but even a slight pullback will not make much of a difference in the global S-D. Further, while we do expect a reversal later in the year, if corn futures continue to soften, this pushes the decision to produce sugar or ethanol from sugarcane back in the favor of sugar, pressuring futures downward. India’s crop numbers have been taken down, and this is currently priced in global supply projections – next year’s crop potential will be even more constructive to the market. Global surplus estimates for the 2008/09 (Oct/Sep) crop year are now between 1 and 2 mmt, which is down from all earlier estimates. As attention turns to 2009/10, the pattern for next year becomes more important, and will be discussed in detail in our monthly global commodity outlooks. In related markets, crude (NYMEX) is now higher following the EIA’s inventory reports, which showed larger decreases in inventory for both crude oil and gasoline (bullish sugar signal). Also, the USDA increased their crop expectations yesterday, which and projected a larger corn crop (which the WTI forecast does not agree with) and a smaller soybean crop, both of which are factors in Brazil’s sugar/ethanol decisions. The short-term view for OCT sugar futures is for more action in the 13.45 to 13.85 cent range, with more downside potential; the low end of this range is near the 50d moving average. We still see MAR09 trading a sizable premium, with the possibility of a supply deficit in 09/10. Technicals this morning are slightly biased to the downside.

We return again to the potential for the Indian crop (current and next crop year). Refer to the weeky Indian rainfall chart that we showed last week, as this stresses the importance of the spatial distribution of rainfall totals associated with Indian Monsoon behavior, and the subsequent yield limiting potential for the current crop. There is a NW-SE axis that essentially splits India’s sugarcane growing regions in two; the monsoon pattern thus far seems to have followed a similar split flow pattern. The more heavily producing north has received healthy, and possibly too much, rain during the current campaign, while the southern growing areas were hit by excessive dryness following the good start in June. The soil moisture profile highlights the situation, as saturated soils and wet conditions increases the risk of disease pressure and slows harvest, while the dryer soils in the south are not retaining much water. Further, closer analysis of satellite derived vegetation health indices are indicating additional stress across the southcentral and southern regions of the subcontinent, where conditions are worse than both last year and normal. The current rainfall pattern is helping, but it will be challenging for growers to make healthy yields during this year’s crop.

A combination of cooler weather in the central and eastern combined with weaker fundamentals including overall demand destruction continue to exert downward pressure on energy prices last week (September Crude/NG), and this bearish market sentiment carried over into Monday and Tuesday’s trading on NYMEX, before the inventory report moved the market back up a bit on Wednesday.  Per last week’s weekly discussion, most of the heat was restricted to the west/southwest states, and population centers from the midwest through the east were spared any weather that would have caused CDDs to spike. Other fundamental news has been at least as important as the cooler weather, including the stronger USD which is at a 5 yr high vs. the Euro, more evidence for weakening demand from China, and the continuing reduction in overall US demand. Consumers are responding to the higher CPI (energy/food inclusive), and the July and August figures should reflect this change in behavior. The June 2008 Energy expenditure index was +6.6% higher than May, with energy commodities increasing 34.7% for the first half of the year. July CPI statistics will be released on August 14th. The current week’s weather should be another period with generally light electricity demand, as the cooler pattern is the dominant feature and evening temperatures are well below normal across many demand centers. Even hurricane activity is secondary at the moment; last week’s Tropical Storm Edouard cut a path right through some oil fields off of eastern TX, and the market reaction was muted. This is quite a contrast from last year when even the sight of a potentially threatening system lead to high volatility. The tropics have a couple of systems that are currently being monitored but there does not appear to be a high probability for development (the GFS model has picked up on a potential pattern that could lead a storm right into the MidAtlantic in a couple of weeks). 

OCT08 sugar (ICE) inched a little higher in Tuesday’s session, and even higher on Wednesday, following Monday’s drop from a high of 14.4. The global supply situation is starting to look like it may develop into an issue this crop year as the weather in Brazil and India may start to cut into the crop estimates. Brazil’s Centre-South had a very healthy June and July rainfall totals were low (normal seasonal pattern), particularly in Sao Paulo state, but the wetter pattern in August and September may slow harvest and new crop plantings. In India, the dryness in the southern subcontinent (see earlier post) will offset the good conditions seen in the north, and a crop reduction is likely. Further, the heavy monsoon rains in central and northern states have delayed crushing operations, and output as of 01-August is behind last year’s pace. According to the National Federation of Co-op Sugar Factories LTD., the next crop year’s production will be around 20 mmt, which is a 25% reduction. With the anticipation of more dryness next year, India, the world’s second largest sugar producer, could return once again to become a net importer to satisfy domestic demand requirements. Given the current uncertainty across all commodity markets, our short-term view is for OCT futures to trade between 13.8 and 14.4 cents, which is above the 50d moving average, as more crop concerns make their way into the market. MAR09 should continue to trade at a premium as the questions surrounding crop size and carry over stocks will push the market up, particularly as we approach the OCT expiration. At Thursday’s open, technical indicators are neutral.

This chart show how the Weather Trends India country-wide rainfall forecast for the past three months has verified. The bars are the year over year (2008 vs. 2007) forecasted change in weekly precipitation totals (mm) and the line represents the observed totals. This forecast which was made during the summer of 2007 verified with 84.6% accuracy. While this year’s monsoon started off strong in June, July was very dry in the south even though the northern sugarcane belt received healthy precipitation totals. Looking ahead, the situation will start to improve for India’s southern cane growing regions, but the lack of surface and subsurface soil moisture remains a problem for the current crop.

Highlights:

•  •The end of last week signaled the start to an extended warm spell that will dictate the pattern in much of Argentina over the next two weeks. While the current week will be warm, the more extreme heat is looking to move into the region next week. •
• The chart below shows daily high temperatures and change from last year. Average temperatures this week in Cordoba will be 17.5°C warmer than the same week of 2007, and 6.3°C above normal. 
• •This pattern could stress the current wheat crop; currently in vegetative state. 

Weather Trends now offers a CDD/HDD planner for the major energy demand centers in the US.  The 1 page report is a daily degree day forecast (CDD in cooling season/HDD in heating season) for the US, and is issued every Monday, Wednesday and Friday.  This low cost energy demand snapshot is a very useful tool for traders and producers alike.  Please contact Michael Ferrari (mferrari - at - wxtrends dot com) if you would like to learn more about receiving this planner each week.  Click here to view today’s CDD planner.

A few weeks back in our weekly grains report, we estimated corn yields to be 6-11% below trend (7-year) and soybean yields to be 5-9% below trend, and in addition, highlighted the significant reduced potential for the corn crop. The weather over the last three weeks has done nothing to help, and the estimates now for corn are 11-13% below trend, and for beans to be 7-10% below trend. This is in line with what was originally discussed in our reports from early June. After visiting midwestern fields last week, many fields are completely under water, and those which are not, are still saturated and early development has been stunted. I anticipate many fields not to even plant, and for those that do, it will be extremely challenging to make even marginal yields. Iowa and Missouri had even more significant rain events last week. I saw many fields with the ankle-high corn that I mentioned earlier; by the end of June, corn is usually waist to shoulder high. While beans may need fewer days to maturity, it is now approaching the point where it is too late for growers to make a switch. Many are comparing this year’s crop potential to the disaster resulting from the 1993 flood event. See FAS maps below for negative crop conditions (through 2nd dekad June).