World sugar weekly
Despite favorable weather in sugarcane areas throughout much of Brazil, India, China and the US, all of the good supply side news in the major origins is being temporarily overshadowed by market activity on oil. Last week, No.11 sugar trading finished roughly where the week started, with March08 sugar closing at 10.13. Last Friday’s trading session saw March sugar go as high as 10.5 before returning back to the low 10 cent range, where it spent most of the week. In a ‘normal’ sugar year, the present fundamentals would be exerting some pretty strong downside pressure on sugar futures. The current global stocks situation, rain in Brazil, the lack of an Atlantic hurricane season and a tapering off in sugar demand should all be factors contributing to keep world sugar below 10 cents/lb. But we are now seeing that this is anything but a normal year, and this point is being underscored by two global economic drivers: the price of oil and the (still) weak US dollar.
New market information and the resultant market psychology move at lightning speed. Trading last week was no exception. In last week’s letter, we discussed the reality of $90 crude prices. After Friday’s trading, crude oil prices above $90 are not really considered news anymore. Last week, December crude traded in a range between 86 and 92, and in overnight trading crude reached $93.20. New highs in oil are fueling commodity volatility across many of the energy and softs markets, and world sugar is no exception. As high oil prices is keeping ethanol demand firm, the potential for diversion of more sugarcane to energy (vs. sugar) remains strong. This is in spite of the favorable global sugar S-D balance; in the October USDA attache report estimated Brazil’s sugar production to be just above 32 million tons for 2007/08, which is up 2% over 2006/07 production. But the report also estimates 07/08 ethanol production to reach 20.75 billion litres, which is 16% higher than last year. While these figures are often revised, and can deviate significantly in future reports, the initial estimates are what traders are utilizing. To add to this uncertainty in sugar futures, the US dollar index has recently sunk to new lows. This keeps more of Brazil’s production moving towards domestic sourcing, and the potential for a decrease in availability of exportable sugar on trader’s minds.
So we should be watching activity in the oil and grains markets pretty closely this week, as volatility will likely spill over into sugar. The next anticipated level of technical support for March08 sugar will still be right around or slightly above the 10 cent mark; a cross through 9.9 cents would indicate that lower lows are likely. Daily closes for Mar08 sugar above 10.15 to 10.2 indicate a short term low has been crossed, and upward price activity is anticipated.
