At this the mid 22 cent range, where sugar goes from here is a different question.  We called for a run up to the low 20 cent range, which has now materialized.  The market perception for a stronger Indian crop over the coming crop year may support a decrease in net long positions, but we still see the potential for supply-driven spikes, which can set the stage for short term moves into the mid 20s.

Readers of this column should no doubt be aware of our bias towards the importance of India with respect to the amount of physical sugar that is available to the world market at any given time.  We have stated numerous times that the sub-optimal pattern with respect to where rain has been falling and where the country’s sugarcane plantations in northern India are located will result in a crop next year which is shorter than many analysts are currently expecting.  India’s position in the market notwithstanding, Brazil, as the world’s largest sugarcane producer, has the potential to move the market with short notice.  Our clients have also been able to take advantage of the current volatility in the raw sugar futures space, as the ‘news’ of Brazil’s dryness now has traders worrying that supply estimates may have to be revised downward again.  To our clients, however, this is not news.  We have expected decent numbers for both current and upcoming crop year production from Brazil, but our crop expectations have been much more conservative than the rest of the market.  The Weather Trends outlook has been built upon the view that the dry pattern that has affected Sao Paulo and western Parana will serve as a production (and yield) inhibitor, and the current market support (OCT-10 futures up over 3% today) is a result of this realization.  The charts below show the Weather Trends long range forecast by week (y/y change) and the solid line is the observation.

BRAZIL – Country Precipitation Summary

BRAZIL – Sao Paulo Precipitation Summary

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This article in Bloomberg Business Week today is in line with how we are viewing the current US corn & soybean crops at Weather Trends.  No doubt, the 2010 crop for both commodities will still produce good numbers for the 18 major growing states.  However, we think both the USDA and the market are too optimistic regarding crop potential.  Look at the July map below – this shows the year-over-year (2010/09) max temperature for July.  Remember, 2009 was a ‘good weather year’, particularly in the Jul-Sep time period.  Heat stress in July followed by a very wet start to August in key states will likely translate to smaller yield numbers than the market is currently figuring.

As a result, we are in agreement with the assessments in the article quoting the analyst from Northstar Commodities. 

week ending Aug 1

Corn (18 major states):  93% silking vs. 74% LY & 86% 5ya; 31% dough vs. 13% LY & 24% 5ya. 

Soybeans (18 major states):  86% blooming vs. 74% LY % 83% 5ya; 53% pod-set vs. 33% LY % 48% 5ya.

Here is the Weather Trends outlook for the progress of the Indian monsoon over the next 7 days.  The first map shows total precipitation expectations for the next 7 days, the second is the forecast vs. the same period in 2009 and the third map is the forecast vs. normal (same time period again).  As the monsoon progresses, some of the rain over the next week will to move into the sugarcane growing regions in the northern states;  this will be helpful to the cane crop as these regions have been moisture deficient thus far (see earlier post highlighting precipitation deficiencies).  With nearby sugar futures now above 17 cents, this pattern may help to curb a continued rise in prices over the next week.  However, India’s domestic stockpiles for the sweetener are still low, so physicals may be held back from the market, thereby keeping sustained upside pressure on raws.

ICE sugar futures are up this morning, again pushing through the mid 16 cent barrier (Jul currently at 16.6).  Licht came out with a statement (reported via Bloomberg)  that higher production in Brazil & India is allowing them to raise their forecast for global production to 155 mmt for the 2009/10 (Oct/Sep) crop year; and that the S-D balance will finally move back into surplus status after nearly 3 years of deficit.  Readers of Weather Trends commodity notes will recognize that this is not news, as we have been discussing the switch back to a positive physical balance in the 2010/11 crop year for several months.  In spite of a favorable supply situation shaping up for the coming year, we still do see some support over the next few months as global demand for the sweetener has not been curtailed.  The current range is what we consider fair value for sugar, and as such, we are advising clients to continue to scale into long positions by buying on dips when we see pullbacks of around 8-9%.

The Indian Monsoon is progressing as we expected this year – we had forecast a better start than last year which has verified with strong convective activity bringing rains to much of the southern subcontinent.  However, the Weather Trends forecast has differed from the Indian Meteorological Department (IMD) & other sources in the fact that we were not expecting a complete rebound over last year (where many other forecasts were).  While monsoon activity at the start of the season has certainly been better than the 2009 season, the precipitation totals in key agricultural regions has still been a little light and I expect this type of pattern to continue through July.  Further, the area that has me the most concerned is the Western Rajasthan region; when the seasonal totals are in, I believe this region, along with portions of Eastern Raj.  will be the hardest hit by a recurring lack of moisture.  Sea Surface Temperatures (SSTs) have started off warm, which is needed for a pattern of strong convection to occur.  But we are noticing in recent weeks that the SSTs off the southern coast have dropped off a bit, so the ‘fuel’ for a good series of storms carry a little less energy.

I will be issuing more definitive numbers on rainfall totals by mid July, but overall Weather Trends is sticking to the original forecast that was previously (better than LY, but no complete rebound over ‘09).  Further, regarding La Nina development, global weather indices are pointing towards a much stronger possibility of La Nina conditions to develop later this year; we are already seeing a rather dramatic change in Pacific SSTs (cooler) and a shift in the Southern Oscillation Index (to positive phase), which are both leading indicators of a transition. The important factor is how rapidly we went from predominantly El Nino conditions to the start of a potentially strong La Nina. We will be watching this and issuing notes in the coming weeks.

(image source: Monsoon online)

A stronger crude oil market and the weaker US dollar will lend support to ICE sugar futures at the start of the week; this coming after the spot contract dropped to the lowest levels seen since before the confirmation of last year’s failure of the Indian Monsoon, which put a premium on raw physical supply and kept the global deficit in check for several months more than many were previously anticipating. Our report that went out last week discussed what we are expecting for the critical onset period; the behavior of the monsoon rains has a higher level of sensitivity in the sugar market this season, coming after a year that saw world sugar prices doubled within a few months in 2009. WTI has been stressing that the outlook for the 2010 onset is favorable – this will help growers in both northern and southern growing belts. However, we still have some concerns for some dryness during the mid-crop period, so the view for the 2010 crop is cautiously optimistic. Now that the market is focusing more attention to India, our reports in the coming weeks will assess our view for the world’s largest producer, Brazil.

Per monday’s note, spot sugar futures coming down:

Despite a healthy seasonal pattern, South American soybeans are becoming susceptible to rust outbreaks this season.  The cool and wet El Nino-induced precipitation pattern set the stage for precursor conditions that are conducive for fungal development.  Following the development, we are now concerned with transport mechanisms.  The Weather Trends map below shows the short range pattern, which is one that puts soybeans in a particularly vulnerable position as they enter the flowering phase in the crop cycle.  Drier conditions look to be developing over the next few days, and as this moist front begins to dissipate and migrate eastward, the prevailing winds from the north/northeast will allow for easier fungal and microbial transport, into the soybean regions of Cordoba.