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.

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.

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.

Following the run up to nearly 33 cents, world (#11) sugar futures have retreated and stayed in the 22-24 cent range for much of the week.  The market is expecting strong production numbers from Brazil and India, the two largest producers, and there seems to be optimism among analysts that the global S-D balance will finally shift to the surplus side in the coming months.  In the USDA Foreign Agriculture Service (FAS) April attache report, their outlook stated that Brazil cane production will increase 2% (to 631 mmt) in the 2011/12 marketing year (MY), with 569 mmt of this volume coming from the Centre-South; the 569 mmt projection is +12mmt over the 2010/11 MY and largely the result of an expansion of hectares for sugarcane, rather than a favorable weather pattern.  See the table below taken from the attache report for harvested hectares over the last 6 seasons.  This is confirmed by the relatively flat total reducing sugar (TRS, or industrial yield) when analyzed Y/Y.  Readers should note that a drier pattern in key mid/late crop months actually serves to boost yields, and tends not to be an inhibiting factor.

While the Weather Trends view is also for an increase in Y/Y production for BR (between +1.3% and +1.6%), we feel that the USDA estimate may be too optimistic.  Further, even with higher production numbers out of Brazil, domestic ethanol demand for flex-fuel cars coupled with high crude prices will still keep a premium built into the #11 price, so the downside price potential remains limited between now and October.  Satellite derived vegetation indices for many of the Centre-South cane growing regions are on par with last year which was considered an average weather year for cane in BR.

Other FAS estimates carrying significance include their view for Indian sugar production to increase 10% for the 2011/12 marketing year (Oct/Sep) to 28.3 mmt raw value as a function of higher total cane production.  The April FAS attache report fort India includes the illustrative chart below from the India Ministry of Agriculture, which shows total cane production and sugar production since the 1990/91 MY.  This shows how in recent years, technological advances as well as the increased demand for raw sugar is allowing growers to extract more sugar per metric ton.  Last year’s gain was also in part due to higher plantings following the Monsoon failure during the previous 2009 season, so the first year in the new retune crop will provide the strongest Y/Y lift; we will still look for a similar increase this year as projected plantings are up again, but as with Brazil, the numbers may be slightly lower than the FAS expectation.

So what does this mean for price?  The onset and the seasonal behavior of the 2011 Indian Monsoon will therefore become a key factor in assessing yield potential this year, and this will be a key variable towards ultimately translating what the crop potential means for the global supply balance sheet into 2012.  Further, while Brazil is looking at a favorable supply scenario, ethanol demand, crude oil prices and the relative strength of the BR real will be equally important in assessing price risk and potential.  Readers are encouraged to refer to this site as more discussions around these topics will appear in the coming weeks and months. 

Please feel free to contact Weather Trends directly if you wish to have a direct consultation around these or other weather/commodity topics.