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.

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)

OCT08 (ICE) world sugar has traded in a tighter range this week, and activity through Wednesday looks to support more of this rangebound pattern. Brazil’s sugar production is behind last year’s pace for early August, but we do not have any serious concerns for the Centre-South crop, and the gap should be closed by the end of the month. The market has reacted to circulating news that Brazil’s sugar production will be lower, but even a slight pullback will not make much of a difference in the global S-D. Further, while we do expect a reversal later in the year, if corn futures continue to soften, this pushes the decision to produce sugar or ethanol from sugarcane back in the favor of sugar, pressuring futures downward. India’s crop numbers have been taken down, and this is currently priced in global supply projections – next year’s crop potential will be even more constructive to the market. Global surplus estimates for the 2008/09 (Oct/Sep) crop year are now between 1 and 2 mmt, which is down from all earlier estimates. As attention turns to 2009/10, the pattern for next year becomes more important, and will be discussed in detail in our monthly global commodity outlooks. In related markets, crude (NYMEX) is now higher following the EIA’s inventory reports, which showed larger decreases in inventory for both crude oil and gasoline (bullish sugar signal). Also, the USDA increased their crop expectations yesterday, which and projected a larger corn crop (which the WTI forecast does not agree with) and a smaller soybean crop, both of which are factors in Brazil’s sugar/ethanol decisions. The short-term view for OCT sugar futures is for more action in the 13.45 to 13.85 cent range, with more downside potential; the low end of this range is near the 50d moving average. We still see MAR09 trading a sizable premium, with the possibility of a supply deficit in 09/10. Technicals this morning are slightly biased to the downside.

We return again to the potential for the Indian crop (current and next crop year). Refer to the weeky Indian rainfall chart that we showed last week, as this stresses the importance of the spatial distribution of rainfall totals associated with Indian Monsoon behavior, and the subsequent yield limiting potential for the current crop. There is a NW-SE axis that essentially splits India’s sugarcane growing regions in two; the monsoon pattern thus far seems to have followed a similar split flow pattern. The more heavily producing north has received healthy, and possibly too much, rain during the current campaign, while the southern growing areas were hit by excessive dryness following the good start in June. The soil moisture profile highlights the situation, as saturated soils and wet conditions increases the risk of disease pressure and slows harvest, while the dryer soils in the south are not retaining much water. Further, closer analysis of satellite derived vegetation health indices are indicating additional stress across the southcentral and southern regions of the subcontinent, where conditions are worse than both last year and normal. The current rainfall pattern is helping, but it will be challenging for growers to make healthy yields during this year’s crop.

OCT08 sugar (ICE) inched a little higher in Tuesday’s session, and even higher on Wednesday, following Monday’s drop from a high of 14.4. The global supply situation is starting to look like it may develop into an issue this crop year as the weather in Brazil and India may start to cut into the crop estimates. Brazil’s Centre-South had a very healthy June and July rainfall totals were low (normal seasonal pattern), particularly in Sao Paulo state, but the wetter pattern in August and September may slow harvest and new crop plantings. In India, the dryness in the southern subcontinent (see earlier post) will offset the good conditions seen in the north, and a crop reduction is likely. Further, the heavy monsoon rains in central and northern states have delayed crushing operations, and output as of 01-August is behind last year’s pace. According to the National Federation of Co-op Sugar Factories LTD., the next crop year’s production will be around 20 mmt, which is a 25% reduction. With the anticipation of more dryness next year, India, the world’s second largest sugar producer, could return once again to become a net importer to satisfy domestic demand requirements. Given the current uncertainty across all commodity markets, our short-term view is for OCT futures to trade between 13.8 and 14.4 cents, which is above the 50d moving average, as more crop concerns make their way into the market. MAR09 should continue to trade at a premium as the questions surrounding crop size and carry over stocks will push the market up, particularly as we approach the OCT expiration. At Thursday’s open, technical indicators are neutral.

This chart show how the Weather Trends India country-wide rainfall forecast for the past three months has verified. The bars are the year over year (2008 vs. 2007) forecasted change in weekly precipitation totals (mm) and the line represents the observed totals. This forecast which was made during the summer of 2007 verified with 84.6% accuracy. While this year’s monsoon started off strong in June, July was very dry in the south even though the northern sugarcane belt received healthy precipitation totals. Looking ahead, the situation will start to improve for India’s southern cane growing regions, but the lack of surface and subsurface soil moisture remains a problem for the current crop.

In the face of continued high oil prices and increased speculative trading in the biofuels sector, Brazil’s much discussed sugar surplus has lead the way for nearby futures prices to plow through the 11 cent barrier and trade in the mid 10 cent range this week. May futures traded below 10.2 cents yesterday, and July traded at a low of 11.77. This move has been driven by the healthy situation on the supply side. Current estimates are placing the global sugar surplus for 2008 at over 10 mmt, which is putting downward pressure on futures. This is lead by Brazil, the world’s largest producer, whose harvest will likely reach another record for the current campaign, according to UNICA. Weather Trends has maintained the view that world sugar futures have been overpriced, and this recent move serves to underscore that point. Growing conditions in most major global origins have been favorable for both current year and next year’s cut. Further, year over year acreage expansions in Brazil, China and India will contribute to more physical sugar on the market for 2008 and 2009. It is important to note that one of the assumptions that the market is incorrectly reacting to is that the higher rain will lead to higher sugar yields – this is not necessarily true. Last week’s rainfall totals in Brazil (shown in the maps) highlight this. The circled areas depict the main cane growing region in Sao Paulo. Last week’s totals were higher than the same period in 2007, as the map on the left shows, but the weekly total was generally below normal for the main Centre-South growing region. As sugarcane is a grass, more rain will lead to more production, represented as higher totals (mass) that is harvested. However, sugar yield (as extractable sugar per unit area) does not demonstrate the same linear correlation. As we mentioned in the 09 April report, April is a month where average to slightly lower rainfall totals will help yields in the current crop as harvest approaches. The higher rainfall seen recently will contribute to more tonnes harvested, but when the sugar yield figures come out later in the year, we may see a number that does not match the current expectations. The market is currently not trading this information, so as far as the spot market is concerned, this may be a moot point; however it is something to consider when looking at future positions.Currently, the Weather Trends short term outlook places fair value for July World sugar futures between 11.6 to 12.1 cents.

World Sugar/Softs report - April 22, 2008

Attached is the WTI World Sugar/Softs weekly report.

WTI Sugar/Softs Report - April 9, 2008

Attached is last week’s Sugar/Softs report (issued 9 Apr 2008). 

Attached is the World Sugar newletter for the week of March 23, 2008 (issued 25 Mar). Please contact Weather Trends International if you are interested in receiveing our weekly commodity reports, as well as the long range weather outlooks and crop projections for world sugar/softs. *Readers should note that the recent activity in No.11 sugar futures is right in line with the Weather Trends discussions contained in the weekly updates. WTI WORLD SUGAR/SOFTS REPORT - MARCH 25, 2008

WTI WORLD SUGAR/SOFTS REPORT - MARCH 18, 2008

This attachment is the World Sugar newsletter for the week of March 17, 2008.  Please contact Weather Trends International if you are interested in receiving our commodity reports each week, in addition to the long range weather outlook for sugar and soft commodities.