Current water vapor satellite is showing less activity in more weak activity & this supports the JulAug dryness that the Weather Trends long range forecast had predicted for this period.  With tight physical supply, this is constructive for #11 futures.

Looking at current Monsoon activity, the IMD weekly update noted that the past week has seen drier conditions across central and western India; regarding sugarcane development, the low precipitation activity across Maharashtra (the largest producing state) may be a cause for concern when projecting physical balances this year.  The seasonal rainfall map to date for the 2011 Monsoon season is shown below.

 Refer to the Weather Trends weekly forecasts to see how the Monsoon is progressing.

The above graphic from the Indian Met Department shows the advance of the 2011 Monsoon as compared to typical onset milestone dates.  As we can see by the progression as of 29-30 May, as well as on the inset map, the convective activity originating over the southern subcontinent has been developing favorably, and new plantings in the (sugarcane) growing regions in the southern states of Karnataka & Tamil Nadu are already benefiting from this pattern.  Further, the analysis of satellite-derived vegetation maps are showing an improvement in both plant health and soil moisture over last year as well as the five year average, supporting the view that the 2011 season will be a benefit to 2011/12 output.

This will be important for the coming ‘11/’12 marketing year, as most analyst expectations seem to support a global surplus to fall in around the range of 5.5-7 mmt, which is an increase over the slight positive balance in 2010/11 following two years of net deficit.  In spite of a favorable weather picture for India as well as Brazil in the short term, higher crude oil (currently up) and a weaker dollar (currently down) will serve to limit the downside risk to Jul/Sep #11 futures in the coming weeks. 

Please visit the Weather Trends updates for notes regarding the progression and impacts of the 2011 Monsoon season through September.

The table above from this week’s USDA Crop Progress report underscores the effect that delayed planting this year has exerted on emergence of the crop.  In spite of planting progress that has picked up over the last 10 days, some regions may start to run into situations where there will not be enough growing degree days in the season to make a decent yield, and as a result, acres in some regions may start to shift to soybeans which have a shorter the maturation cycle.

Here is an excerpt from the note sent to clients early this week:

…we have been highlighting the delayed start to the corn season in the US as a result of the cold and wet conditions, inhibiting planting progress.  Over the last couple of weeks, we have seen planting progress close the gap between the pace set last year and the 5 year average; in Monday’s USDA Crop Progress update, the major growing states were now 79% planted, vs. 92% this time last year and the 5 yr ave of 87%.  While some lost time has been accounted for in recent weeks, the crop is still behind.  The emergence chart above from yesterday’s report shoes that 45% of the crop is emerged, vs. 69% last year.  In any other year, this might not be a cause for concern, but with such a tight supply balance this year, which is expected to remain tight into early 2012 due to strong demand expectations, this will likely translate to a bullish outlook for  corn futures at least through September.  In spite of the recent decline, we advised clients that this dip may be a favorable entry point for July/Sep corn contracts, and our forward view still supports a constructive market…

This note in the Farmgate Blog echoes what we have been discussing, supporting our expectations that Weather Trends has been pointing to as risk factors for the last two months.  Mid-crop weather will become VERY important this season.

Our biggest weather concern in the US at the moment is on the corn side.  A cold and wet start to planting in the US has put planting pace well behind last year.  The week ending May 15th saw some significant planting progress, narrowing the gap that has been present since the season started.  But even though the planting pace has picked up, the crop is still delayed (21% of corn emerged vs. 53% last year in the 18 major growing states).  We may start to see a shift in acres from corn to beans.  This coupled with sustained demand we feel will place upside risk to costs on the feed side, which we feel will continue to rise through the end of 2011.

Sugar may start to turn constructive on analyst reports of a smaller than expected crop.  We noted yesterday that one high-profile estimate has recently called for a 10.6 mmt surplus in 2011/12, which follows a slight return to positive supply balances in the current marketing year.  However, as we also stressed, the Indian Monsoon is likely to get off to a good start in June, but mid-crop weather may serve to limit the strong numbers being discussed in the market.  In addition, in a Bloomberg article today, there is now appears to be some sentiment that output in Brazil may temper some of the positive supply expectations for both the current and coming year.  It is appropriate to take a look at some of the information that was presented to clients in a newsletter from February 28th (excerpt below), highlighting the potential supply risk:

 "A smaller safety net –The reports that Weather Trends has been issuing regarding the global sugar supply situation has, for several months, been calling for a gradual improvement to the global balance sheet; however, we have always been somewhat less optimistic than most consensus estimates regarding the timing and velocity regarding the shift to surplus status.  Most agencies had been figuring a number of +1.3 to +1.5 mmt for the 2010/11 (Oct/Sep) year, which is down from earlier projections in the +2.5 to +3.0 mmt range.  The International Sugar Organization (ISO) recently issued a revision to their outlook, placing their expectation for 2010/11 at +196,000 mt, down significantly from their 1.3 mmt number from last November.  Given the margin of potential error on these forecasts, 2010/11 could easily remain in deficit or at least at a break even point for the current marketing year.  Further, there is still the potential for poor weather  over the next couple of months to negatively impact cane devoted to the next (2011/12) season."

Amidst strong global demand, weather will play a very important role in determining the size if the global 2011/12 balance.

In the USDA Foreign Agriculture Service May 2011 World Agricultural Production Report, it was noted that projected corn production in the US for the 2011/12 season is currently at 343.04 mmt, which would be an 8.5% increase over last year.  The increase in planting acres (roughly +1.4 mm ha) is largely responsible for the favorable supply outlook as yields are anticipated to increase only slightly.  Globally, the production balance is estimated by USDA to come in +6.42% higher than last year.  Our summer outlook is hinting at some y/y dryness in the western corn belt in July (see map below), while in the east, we are expecting a favorable pattern.  We have noted in previous columns that numerous analysts are stressing the need for ‘perfect weather’ in order to generate the supply needed to keep pace with corn demand, coming from both the food and fuel sectors.  The current flooding along the southern belt has already delayed crop plantings, and looking at anticipated dryness creeping in during August, we are betting against a perfect summer.

The NASS Crop Production Report from May 11th highlighted the April flooding up an down the Mississippi River.  In addition, the wet (and cool) weather delayed planting of the corn crop which was reflected again by the planted acres status as of May 8th, highlighted in the following table.  The first map below shows the late April y/y precip, and the second underscores the %soil moisture for the same period.  For the top corn growing states, planting progress was 40% complete, vs. 80% this time last year.  It follows that only 7% of corn had emerged by that date, compared to 36% in 2010 and a five year average of 21%

With the longer maturity cycle required for corn, as the planting window begins to narrow, growers may start to be faced with the decision to switch acres to another crop with a shorter growing cycle such as soybeans, but some may also opt for planting cotton and groundnuts, particularly in the southeastern states.  Despite macroeconomic uncertainty, the general outlook is for sustained demand, so after corn futures have been pulled back along with the broader ags/softs commodity complex, the outlook may start to turn constructive in the coming weeks.  In addition, the recent surge in beef and dairy demand will strengthen the feed market in the US.

World Sugar futures have dropped off from the recent highs in February (crossing 35 cents) down to a current range just under 22 cents; see FinViz chart below for recent performance of the July11 contract.  The spot price is now below both the 50 and 200 day moving averages.

Most estimates are putting the current year’s (Oct/Sep) supply balance at roughly a 1-2mmt surplus; a thin cushion following two years of net deficit.  High prices coupled with the prospect of continued strong global demand for the sweetener have certainly spurred an increase in plantings, and this is expected to produce a strong physical supply surplus going forward.  Now as we turn to the coming 2011/12 year, supply estimates are all over the board.  Jonathan Kingsman, one of the premier industry analysts, has called for a 2011/12 surplus of approximately 10.6 mmt, which happens to be the highest surplus estimate of those surveyed.  Surplus estimates for 2011/12 vary from a modest 6.5 mmt (conf. source) to the high end provided by Kingsman.  WTI is also expecting another year in surplus status for 2011/12, but our view is closer to the lower end of this range.  The suite of estimates has contributed to the bearish pattern seen in futures recently, but there may be an opportunity that accompanies this dip. 

There are two reasons for this potential opportunity.  First, many of the favorable supply expectations are figuring in large or even record crops in India, Brazil, China and Thailand.  These estimates are largely assuming very good growing weather throughout the upcoming campaigns.  We have noted that we agree with the Indian Meteorology Department’s outlook for a good start to the 2011 Monsoon, but we do see the possibility of mid-crop weather risk, which could have the potential to limit yields.  We still expect a good crop, but we are viewing the season with cautious optimism.  Second, the demand side of the equation will partially offset some of the strong surplus that is figured into many of the forward looking balance sheets.  If the demand piece keeps pace with increases in projected supply, the supply buffer may not be as safe as many are thinking, especially if oil remains anywhere near the current $100 range.  Remember, while oil is down from the highs in the $114 range, $99 oil is still expensive oil, and sustained high oil prices will lending additional support to the demand for sugarcane derived ethanol.

Next week in New York, many of the world’s largest sugar producers and consumers will convene for a series of events are part of the annual Sugar Week.  We anticipate that many of these topics will be discussed, and we will comment on any findings of interest.

Earlier in the week, we noted that the US corn planting conditions have been suboptimal, with planting pace significantly behind both last year and the five year average for this date.  Cold wet weather has slowed field activities, particularly in the northern and central growing regions.  The USDA Crop Progress report for the week ending May 1st underdscores this point (see table below).  For the primary growing states, 13% of the intended acres were in the ground vs. 66% in 2010.  For potential yield modelers, we recommend using a ‘late-plant’ scenario for 2011.  This does not mean that the US can not make a decent crop this year, but it will highlihght the need for better post-germination weather.  We are looking at the cooler weather to give way to a milder and drier pattern over the next few days into next week, so we are expecting some of this gap to be closed over the next two weeks.

 While the broader ags and softs complex has softened recently, there may be a reversal around the corner, particularly for corn.  To support this assumption, readers should view the Food and Agriculture Organization (FAO) supply & demand brief which was released today.  In the brief, the FAO confirms that the 2010/11 estimated S-D balance has gotten worse approaching the end of the marketing year (see first chart below).  In their summary, they state that global cereal production is projected to decrease -1.2% for 2010/11 and this may add some upside risk to prices in the short term.  In addition, the second chart below highlights the difference in cereal prices vs. where they were one year ago as represented in the food commodity price index.  The overall price index averaged 232 points in April 2011 (+35% y/y) and the cereal price index averaged 265 points which is an increase of 71% over April 2010.

In light of the tight global S-D situation, even though the USD is showing signs of strength this morning, the broader downward trend that the dollar has displayed emphasizes the upside risk to grain/oilseed prices going forward.  Further, the notion of the necessity for ‘perfect US weather’ that many analysts have been calling for is already being tested, adding to the upside risk.  Even with the expectations for larger crops across many of the world’s primary origins, demand has not eased and the projection for shrinking grain inventories amid low stock to use ratios should limit downside activity concerning corn prices for July/Sep contracts.