For the last week, March09 ICE sugar futures have been rangebound, between 11.3 and 11.8 cents; trading has shown a very slight increasing trend after a low in the mid 10 cent range during the last week in October. As we have been stating for several weeks, the WTI view is that current mid 11 cent levels provide an attractive entry point for March09; the current levels may also favorable to enter into longer positions for 2nd/3rd futures as well, as most longer term fundamentals are constructive to this market.

The table above highlights the short term daily pattern for the next month at select locations in Brazil. While new crop plantings are mostly complete, the cooler temperature outlook for the next month will be a limiting factor in the early stages of this crop. We are not expecting a return to milder conditions (vs. normal and LY) until mid December for most major growing areas. So, from a longer term supply perspective, we are already seeing pressure on the supply side. UNICA also had recently stated that production of sugar in the Centre-South will not meet demand requirements for the next two to three years. Further, the ISO’s recent estimates are projecting a deficit of over 3.5 mmt, and this is partially due to lower expectations from Brazil. While there has been a high degree of uncertainty in the global commodity market, prices at these levels combined with a potential stabilization (possible reversal) of the depressed grains complex may spur demand for physicals, leading to more support for futures in 2009. There is more talk of supply pressure in the Brazil ethanol markets (hydrous and anhydrous) as well, and this can lend additional support to sugar in the coming weeks and months. While the general fundamental supply picture looks to support higher prices, analysts should be careful when setting market expectations for the coming year. According to Júlio Maria M. Borges, director at the Sao Paulo based JOB Economia consultancy, between 2% and 3% of cane from the current crush will remain in the field, but a favorable moisture outlook through December will allow for better progress over the coming months. He also notes that the global market conditions for world sugar support firm prices, however the rise should not be particularly rapid, in which case exposures can be managed.

The WTI view for fair value March09 sugar is in the 12.35 to 12.9 cent range. The next monthly commodity review (for clients) will address global supply & stocks outlook for sugar/softs, grains and energy related commodities.

Now that the US presidential elections are over, it is a good time to take a look back and assess our track record in calling the shorter term movements as well as the longer term trends seen in world sugar futures (ICE) over the last few months. With March as the nearby contract, we provide a brief recap of how March09 sugar has traded, as well as our price range recommendations that were made at the time. This graphic shows that most of the short term and long term ideas that were developed at Weather Trends have been confirmed by the market. This confirmation adds to our confidence on how the world sugar fundamentals will influence market moves as we prepare for 2009. With all of the current uncertainty in both commodity and equity markets at the moment, the views provided here can help manage the short term volatility, as well as provide a proactive look at some of the factors that will move the markets in 2nd/3rd futures. As we stated in our letter last week, the WTI view is still for March09 fair value in the 12.5 to 12.9 cent range; yesterday’s close for March was 12.72.

The next WTI monthly commodity review (for clients only) will address the global supply and stocks outlook for sugar/softs, grains and energy related commodities.

( chart from INO.com.)

Weather Trends has released a new white paper, titled ‘Anticipating the Climate Black Swan’ applying the idea popularized by Nassim Taleb’s excellent book (The Black Swan, 2007).  Go here for the press release and to download the paper.

Per Monday’s USDA Crop Progress report, corn harvest in the major growing states is well behind both last year and normal for early November.  The current week’s warmer pattern will help to make up for some lost time, but this is still a setback for potential yields.  WTI has been forecasting less than optimal harvest weather since before the start of the planting season.

In many of our recent weekly and monthly commodity discussions, we have been talking about the potential for a sharp reversal in sugar futures. As we still have several months before expiration of the current contract, many factors are wildcards that can support a constructive pattern, in spite of the overall softening of global markets. While it is too early to call the current activity in sugar a reversal, March09 ICE sugar futures have shown some signs of strength, and this is at least a partial reaction to some the reasons that we have been figuring into our supply estimates.
March sugar has been strong this week, and today’s activity is more confirmation of at least a short term reversal – at the time of this writing, March is trading at 11.86 (+0.72), right at the 50 day moving average. Brazil made news yesterday as traders are increasing long positions on speculation that production will be down. We have maintained that Brazil will still have healthy production numbers, but that they will be a little lower than where most of the industry estimates have been discussing. Any time there is a downward revision in Brazil’s output, we see this type of market reaction. In addition the dollar remains strong, and price levels have been approaching or even dropping below production costs for many major origins; both factors are constructive to the market for globally traded commodities such as sugar. Another factor in a separate yet related market came out of the USDA early this week. The USDA issued an adjustment (downward) to their acreage and production estimates for several crops, including corn and soybeans. While the revision will not affect crop payments made to growers, it will affect the supply balance, which is important in estimating biofuel raw material supply and carryover stocks into 2009. Their statement revised the acreage estimates down 1.2% and 1.4% for corn and soybeans, respectively. As a result, the grains complex showed strength which has been increasing over the last several sessions on reduced crop prospects as a result of the spring and summer weather pattern. Less corn supply will support futures, and this will also serve to support sugar as more cane can then be profitable diverted to ethanol production in Brazil, reducing supply for the sweetener. The market is still below the WTI fair value range for Mar09 sugar (12.5 – 12.9 cents), but the gap is closing. We discussed last week’s sub-11 cent move as a good entry point for March, and traders who were able to execute at these levels are likely in a favorable position.

March09 ICE sugar futures have declined steadily since Monday’s session, now trading below 11 cents. While the current trend is for the technical indicators to place more downside pressure on futures, we continue to watch the dollar for signs of a reversal. The two charts below show the inverse relationship between the two this week – as the dollar strengthens, sugar has steadily fallen, getting as low as 10.73, which are the lowest levels since October 2008. There is a relationship with crude (and the broader weakening across the commodity spectrum), but different factors will start to come into play at we approach the and of 2008. Demand destruction in the oil space is well documented, and it is conceivable that oil will continue to slide further. At the current trading levels, world sugar prices do not have much more downside potential. There are several fundamental reasons to support this. First, even with lower crude prices allowing Brazilian production to swing back in favor of increased sugar (over ethanol), global demand for the sweetener remains strong, and any additional sugar available to the physical market will not have to search for a home, so the global S-D will not be significantly affected by higher stocks. Also, a slight increase from the Centre-South will not offset the reduction to the Indian crop for both the current and next crop year, which is a supply factor that we have been highlighting for months. In addition, despite the fact that US$ is the strongest we have seen in 2 years against the global benchmark currencies (US$ has risen 8% in the last month), this should be viewed as a short term opportunity, and possibly a favorable entry point for MarMay09. The nearby contract is Mar09, and current futures levels are hovering around the cost to produce for the major origins. When production margins are squeezed (and we are approaching this point), high volume producers can and will withhold physicals from the market until the prices move in their favor; if this situation plays out, this will not be the first time the market has seen such a move in recent years. 

With our view of fair value for Mar09 sugar around the 12.5 cent+ range, the time may be good to begin strengthening long positions, as the outlook between now and early 2009 is constructive for the market. This recent pullback below 11 cents may be the only time we see prices at these levels for the near future, even if the broader commodity market continues to slide. The next WTI monthly commodity review (for clients only) will be held the first week in November, and will address the outlook for carry over stocks and crop potential in more detail.

current activity (09:55 eastern):

SBH09: 10.9 (-.06)

SBK09: 11.26 (-.04)

SBN09: 11.43 (-.03)

Heavy rains will continue to impede harvest in the western corn belt, as a moisture laden low pressure system moves through the central US.  Soybean harvest will be affected as well, but the timing of the event will have more of an impact to corn.  The US corn belt has seen a series of poor weather events cause problems for harvest operations.  This cooler and wetter fall was part of the outlook that shaped the Weather Trends outlook for reduced yields all summer.  Harvest is well behind last year’s pace - the most recent USDA crop progress update (20 Oct) reported that 29% of the US corn crop had been harvested, versus 58% for the same time last year.  At this writing, corn, soy, and wheat futures are all trading down.

Corn and soybean futures finished Monday’s session higher (near session highs for both). Traders were focused on a smaller rally, which lead to the covering of short positions, particularly on beans. In overnight activity, both corn and beans started strong, then weakened to lower levels. Crude is down, while the USD strengthened.   A wetter pattern is developing in parts of the western US grains belt, triggering delays over areas that have not yet been harvested. This poor harvest weather will contribute to further reductions in yield potential for the corn crop, a factor not yet accounted for in USDA yield estimates.   Given the short term outlook, we expect price support for corn and beans this week into next.

WTI yield estimates this week have not changed from the previous letter: corn at 140.9 -142 bu/acre, and soybeans still at 38.5-40 bu/acre (18 major growing states).

Dryness in NSW has lead to estimates of the Australian wheat crop to be reduced (Australian Crop Forecasters). ACF is putting wheat at 20 mmt, down from 21mmt. According to ProFarmer, most private estimates are ranging between 20 and 23.6 mmt; AUS gov’t estimate at 22.5 mmt.  Despite reductions in crude futures, palm oil futures have strengthened, signaling that the perceived demand from the biofuel sector will remain strong. Tight global stocks should keep this market constructive into next year.

In our weekly reports and discussions with ag traders and producers, we have been noting the dryness in Argentina’s wheat regions, and the potentially significant impact on production and yield for the 08/09 crop.  September’s NDVI (above, from USDA) highlights the stress.  Today, Argentina’s agricultural secretariat revised their wheat crop estimate down to a range of 9.5 to 11 mmt for 2008/09, which is down sharply from the 16.3 mmt crop from last year.

March09 ICE sugar futures showed some strength early in the week, moving up about a cent (11.2 to 12.2) before trading down in the mid to upper 11 cent range by late Tuesday (closing at 11.71). Technicals support a slightly lower open on Wednesday. The US dollar slid some more against the benchmark currencies, and this is lends some price support, however, a stable supply outlook and good weather for harvesting cane can limit movement on the upside. WTI still maintains that dips on March09 in 11.1 to 11.5 cent territory are viewed as attractive entry points, as our longer term expectations are for gradual support for futures prices.

A weaker dollar will make physical sugar purchases an attractive to buyers with stronger currency position. With no significant issues in Brazil (which can of course change quickly), some pressure can be taken off of the world’s largest producer. Lower crude and subsequent decreases in the grains complex (soybeans and wheat closed lower; corn was mixed) will ease the sugar supply situation, allowing more diversion of cane to sugar production. Readers of our grains reports will note that our extended outlook for the grains complex is however constructive to the market, as we feel that the recent WASDE has overestimated yield potentials in the US and other major origins, and this should lead to a reversal in the market later in the year.

In spite of favorable weather in Brazil, the wildcard this year will still be India. More news of the extend of the short crop in India is now in the market; a factor that we have been discussing all summer, and we addressed this topic in more detail during our monthly market call earlier this week. Global sugar inventories may not match the higher global demand for the start of the Oct/Sep 2008/09 crop year; with a smaller Indian crop this year and next year, March, May and even July 09 futures will start to see additional support as we move towards the end of the calendar year. The next WTI monthly commodity review will be held the first week in November.