World Sugar weekly update – Dec.10
As we are in a period of high speculative trading in World sugar, the fundamentals are still pointing at a favorable supply situation in 2008. Weather is generally favorable in Brazil, India, and Thailand, and conditions are improving in Australia. While Australia’s percentage contribution to the global supply of exportable sugar has decreased in recent years, the Weather Trends long range outlook is looking favorable for much of coastal Queensland, and next year Australia may bounce back and contribute a larger share to global stocks; this could make one of the swing countries in determining the size of the global surplus (or deficit). Now that we are in the midst of the holiday season for much of the world, global stocks are still healthy, even in the face of an increase in demand. However, there is the hint of extended dryness in Brazil’s Centre-South, and the current La Nina may serve to support drier than normal conditions through the first few months in 2008. March08 #11 trading has been relatively rangebound between 9.6 and 10.1 for the better part of the last four months; this neutral trading pattern has persisted even as we have seen the recent surge in both crude oil and soybean futures prices. So as March is the next tradable contract, where do we go from here?
We have been discussing the ‘correct’ valuation of world sugar for months, and our fundamental view hasn’t changed; world sugar prices at or just below 10 cents is a reasonable level for sugar, even with external drivers that might suggest some more significant upward pressure. Sugar price support coming from oil is still evident, but crude has come off slightly from the record high of $99.29/barrel that we saw in November, and January crude traded as low as $85.82 last week. The outlook from OPEC and EIA is that demand going forward is projected to slow. As oil prices soften, the grains complex, notably soybeans, should follow, as biodiesel demand should see a reduction. While the northeastern US has been experiencing real winter weather over the last few weeks, the WTI outlook is for the second half of winter to see a demand decrease, thereby easing pressure for distillates. These factors in the ancillary markets should serve to limit the upward movement of world sugar futures for the first quarter of 2008.
So we are in the ‘quiet period’ from a sugar fundamental perspective, so we will continue to closely monitor the activity in grains and oil for breakout signals. The next level of technical support for the March08 sugar contract will still be 9.95; daily closes above this level indicate short term lows have been posted. Daily closes below 9.85 indicate that a bearish sentiment is starting to build, and lower prices would follow.
