World Sugar Update – January 2009
The March09 ICE sugar futures is now in the range that WTI has been discussing as fair value for several months. Current trading levels on the nearby contract are at the highest that we have seen since early November. Other than a few brief episodes, World sugar has been below 12 cents since early October; lower crude prices pulled many ags/softs down during its decline through the second half of 2008. While the mid 15 cent sugar of July and August was probably too high, sub 11 cent sugar is also too low given the global supply and demand outlook.
In many of our weekly reports that were issued between October and December 2008, we repeatedly stressed that (sub) 11 cent sugar was a good entry point for first and second futures. On the supply side, we reported supply concerns at the major origins; primarily Brazil and India. Brazil’s Centre-South has shown some dryness, and surface and subsurface soil moisture is at or below last year’s levels across much of the primary cane growing region. The short term outlook highlights the potential for some, but not significant improvement from a moisture perspective. Turning to India, the now well-known crop reduction for the current crop year has even more downside potential as the weather outlook for the coming months is not favorable for the early development stages of the current crop; a better pattern is expected starting in March. These supply issues combined with projected demand increases resulting from increased tenders resulting from these lower prices may lead to supply tightness in global stocks, which will start to be realized by 2Q/3Q09. At the start of 2009, most fundamentals are constructive for sugar futures, and we still recommend that any time price scales back to the mid 11 cent range, these will be brief episodes and should be viewed as attractive entry points for March, May and July contracts. The WTI view for fair value March09 sugar is in the 12.3 to 12.9 cent range, and we will resume issuing this estimate on a weekly basis in our updates and in special releases.
