World sugar trading in a ‘fair value’ range
In the face of continued high oil prices and increased speculative trading in the biofuels sector, Brazil’s much discussed sugar surplus has lead the way for nearby futures prices to plow through the 11 cent barrier and trade in the mid 10 cent range this week. May futures traded below 10.2 cents yesterday, and July traded at a low of 11.77. This move has been driven by the healthy situation on the supply side. Current estimates are placing the global sugar surplus for 2008 at over 10 mmt, which is putting downward pressure on futures. This is lead by Brazil, the world’s largest producer, whose harvest will likely reach another record for the current campaign, according to UNICA. Weather Trends has maintained the view that world sugar futures have been overpriced, and this recent move serves to underscore that point. Growing conditions in most major global origins have been favorable for both current year and next year’s cut. Further, year over year acreage expansions in Brazil, China and India will contribute to more physical sugar on the market for 2008 and 2009. It is important to note that one of the assumptions that the market is incorrectly reacting to is that the higher rain will lead to higher sugar yields – this is not necessarily true. Last week’s rainfall totals in Brazil (shown in the maps) highlight this. The circled areas depict the main cane growing region in Sao Paulo. Last week’s totals were higher than the same period in 2007, as the map on the left shows, but the weekly total was generally below normal for the main Centre-South growing region. As sugarcane is a grass, more rain will lead to more production, represented as higher totals (mass) that is harvested. However, sugar yield (as extractable sugar per unit area) does not demonstrate the same linear correlation. As we mentioned in the 09 April report, April is a month where average to slightly lower rainfall totals will help yields in the current crop as harvest approaches. The higher rainfall seen recently will contribute to more tonnes harvested, but when the sugar yield figures come out later in the year, we may see a number that does not match the current expectations. The market is currently not trading this information, so as far as the spot market is concerned, this may be a moot point; however it is something to consider when looking at future positions.Currently, the Weather Trends short term outlook places fair value for July World sugar futures between 11.6 to 12.1 cents.
