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.

Last week’s heating demand was fairly light as warmer temperatures dominated the pattern for much of the country for most of the week. The pattern is shifting this week as the cold front that we discussed last week moved into the lower 48 Sunday into Monday; this front combined with some fairly strong wind activity is bringing a cooler pattern to the central and eastern states. The outlook remains cool for many demand centers into next week, so expect higher HDD values for many of the larger population regions, particularly from the Midwest through the east coast. The WTI HDD outlook for November is anticipating a pattern that is generally colder than last year for most of the remainder of November, with a return to somewhat milder temperatures during the last week of the month. In spite of falling crude prices and the EIA’s downward revision of 2009 demand estimates, snow cover per this date is higher than last year, supporting the cooler early start to the heating season that we had forecast in the long range outlook.

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.)

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This table shows the Weather Trends International US HDD outlook for the next 4 weeks at the CME city locations (HDD value and change from last year).  Despite some warmth this week, we do expect another shot of cool air leading to higher heating demand requirements in mid November.

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)

As we discussed last week, the current pattern is quite a change from last week’s weather influenced energy demand. The east is in the midst of a cold week this week, and will see the heat switch staying ‘on’ for the next 6-8 days. HDDs for most eastern cities will be above both normal and last year for this stage in October. The outlook extending into next week will remain cold, and this will be supported by the shift to a negative trending NAO and AO. Despite the cold weather and an anticipation of OPEC production cuts, crude has softened further, with expectations of weakening demand weighing heavy among traders’ views. The strength of the US dollar (recent month rise of over 8%) is a contributing factor towards decreased overseas demand. The weekly pattern in natural gas, however, has diverged from oil and the last 5 days show an increasing slope; the current and extended cool pattern is providing support for NG futures, and traders should look for retracements as entry points for both NG and Heating Oil (NovJan). 

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.