Here is the discussion of the world sugar markets that was communicated earlier this week:

World sugar futures continue to trade in the range that WTI has been discussing, as the market comes to grips with the fact that, while a global shortage in physical supply still exists, we are likely beyond the most difficult point with respect to market tightness, and the outlook going forward is one of cautious optimism.  Last week’s move (Mar10 dropping from nearly 30 cents to the mid 26 cent range), puts sugar futures in a range that we feel is considered fair value, keeping in mind the current magnitude of the global physical balance, and the prospects of improvement as we move through 2010.  As stated, we view this recent move as a mild correction, and still expect the longer range trend to remain constructive over the coming months.  Our long range analysis is focusing on the Indian Monsoon onset and El Nino direction as the two key milestones in our supply forecast going forward; these two factors will shape our balance sheet expectations for the remainder of the Oct/Sep crop year.

Mar is currently at 26.34; May at 25.63.

Will this be the week where world sugar breaks, or will the impressive rally in raw sugar continue? While most in the ags space spend nearly all of their time and energy in analyzing the grains sector, the big story, and one that will continue to unfold throughout 2010, has emerged from the sweetener space.

The run in spot raw sugar futures to 30 cents has been nothing short of spectacular from a %gain standpoint, but at this stage, the market is now at a crossroads. Producers rode the wave up to 30 cents with wider margins, but at these levels, sustained higher prices will curb demand, which we are already seeing in India, Pakistan and Egypt. Add to this the continued strength of the USD, and there may be more downside pressure in the short term.  Weather Trends acknowledges that the market is still in a global deficit and the view for the Indian growing season is not favorable from a weather perspective, so there will be some resistance against a rapid downturn. However, in the short term, we do feel that a slight retracement to the mid 20 cent range (.25-.27) may be coming in the near future. We are advising to monitor for short term softening combined with strength in 3rd/4th futures as an attractive spread opportunity.

Following an extended trend of upward futures behavior that lasted for most of the last month, ICE sugar futures (Mar10) have now retreated back down to below the 22-22.5 cent mark, with a sharp drop seen at the end of last week. This dip puts the spot contract below the 50d moving average, and may provide opportunity for a short term play on the Mar10 contract.

This also plays into the outlook on the Mar10/May10 spread, which has narrowed further in the last few sessions. The closer we get to Nov09 expiration, the more we will see speculation on global supplies for the first half of 2010 move the market, and as long range outlooks are still not necessarily favorable in many of the world’s major origins outside of Brazil, we do anticipate the spreads for all late 2010 contracts to widen. The current global SST anomalies shown above (CDC monthly anom.) are still supporting the continuing development of El Nino, and while it may not be a strong event, dryness across many cane origins should dominate the pattern through early 2010.

After almost reaching the 23 cent mark last week, September sugar is back down below 22, helped by a more active monsoon pattern towards the end of last week. The rains are particularly helpful for Uttar Pradesh, India’s largest cane growing region. The danger here is that we are hearing many in the market talk of a monsoon ‘revival’, and we do not believe this to be the case. We do see some short term improvement that will help both northern and southern India’s cane crop over the next two weeks. However, the longer range outlook is still looking to remain dry through the end of September, and the current softening seen in the market may provide another opportunity to enter Mar10 positions. That said, at this stage in the year, we still believe that much of the talk in the market about 40+ cent world sugar are exaggerated, and we are awaiting a correction once most global balance sheets start to show more agreement. This is not diminishing upside risk potential in the short term, but our longer term view as we approach 4Q09 is for price levels to pull back into the teens.

Per yesterday’s post, we may see OCT move towards the 20 cent mark very soon.  Overnight trading is down across the commodity board (lead by crude down about 1.5%), but the weather picture in India may limit the downside.  The extended range forecast for India is not very favorable for rainfall, so there should be more upside support in the next few sessions.

In the coming weeks, raw sugar (ICE) may be testing new highs as more emphasis is being placed on the pending market tightness, driven by the current production deficit in India.  White sugar in London is also trading at the highest levels in over 20 years.  Currently, we see a favorable global macro picture, which is spurring the broader commodity complex (ags/energy/metals) to trade at higher levels, but the biggest factor in sugar is the fear of a widening gap between supply and demand into 2010.  And the weather news is not coming from the world’s #1 producer (Brazil); rather, ti is coming from India.  Weather Trends clients had our forecast for a poor 2009 monsoon as early as last fall.  Despite the significant lack of rainfall this year, the Indian Met Dept has yet to decrease their outlook since their 24 June statement.  At this stage in the season, there is only one way to revise the seasonal projection; this is now not only affecting sugar, but also India’s grains/rice and tea crops.  As we have noted in previous letters, the bigger threat to sugar at this stage is for El Nino driven dryness (see map above) to curtail next year’s production, so we may be in for a large scale fundamental change in the world sugar market for 2010.

There has been a quiet story brewing in the global agricultural commodities sector for some time now, which has been overshadowed by the usual suspects amongst the larger economic indicators.  The Indian monsoon is setting up for a below normal season, and this comes in a year when the country needs healthy rains to stimulate the agricultural sector more than most other years in recent history.  Some of the acute effects can be seen in world sugar futures, where the OCT09 contract is now approaching the 18 cent mark.  A potential monsoon failure has notable implications to the Indian domestic sugar market.  After improving production to become a net exporter a couple of crop years back, the current campaign in India will be the second straight year where the country reverted to net importer status….based on the current lack of physical domestic stocks coupled with the developing El Nino’s potential to impact the 2009/10 crop, import status might be extended for another year.  Sugar is just one example.  While India’s GDP figures that are directly attributed to agricultural activity do not look all that impressive upon first glance, overall economic activity that is agriculturally dependent approaches 2/3 of the economy when we consider the ancillary sectors such as machinery, fertilizer, chemicals, etc.  So a drought in India can be extrapolated as a drought for the Indian economy. 

Some regions have been receiving rains during this monsoon (see current satellite above), however, this only provides a false sense of security to those thinking conditions are good everywhere.  While the regions that have received a healthy rainfall pattern have been noted in the media as having received too much (leading to localized flooding, etc), for the majority of the agricultural production regions, areas needing the rains the most, have been largely deficient.  Adding to the problem is that at the start of the season, the Indian Meteorological Department, which is the sole source of weather information to many, had forecast a normal monsoon.  We are not even halfway through the official monsoon season, and the IMD has since decreased their forecast twice, and is likely to do so again in the near future.  The point of this post is that there are alternatives that people should be aware of.  Earlier this month, I gave a talk at Sugar Asia 2009, an industry conference for agricultural technologists and marketers, and the topic of the lecture was timely in light of the circumstances.  In the talk, I discussed the Weather Trends seasonal precipitation forecast for India over the monsoon season, and my impression at the time was that all of the rainfall deficiencies I was describing appeared to be news to many in the audience (the second part of the talk focused on the El Nino pattern which has the ability to cause problems for Indian sugarcane growers next year). 

Instead of rehashing the entire discussion, I am posting what was conveyed to reporters in the press room after the talk.  To keep the context of what was originally reported, I only made a few grammar and language edits for ease of reading.  While some of the points discussed below do not exactly explain what was said in the interviews (as can be expected with any press interview), I will still leave as is for the benefit of others who first read this directly.

INTERVIEW: US expert says El Nino to adversely impact India rains

Tuesday, Jul 7

    NEW DELHI – Uniform spread of southwest monsoon rains in India this year

could be marred by disturbances in the weather pattern, partially caused by El Nino warm water currents in the Pacific, said Michael Ferrari, PhD, vice-president at Weather Trends International, a US based weather data provider.

    The development of El Nino conditions could impact rains this

season and next year, thereby affecting agricultural output, Ferrari said in an interview.  He expects the southwest monsoon rain this year to be 85% of the long

period average, at best.

    The India Meteorological Department has projected the southwest monsoon this

season to be 93% of long period average.  The southwest monsoon rainfall so far has been very poor. According to IMD, the weighted average rainfall in the country during Jun 1-Jul 2 was 102.9 mm, 43% below normal.  During the period, rainfall was deficient or scanty in 29 meteorological sub-divisions.

    "At this stage, I am concerned over the current transition of weather conditions to an El Nino pattern this year. Also there are certain conditions of unpredictability prevailing about the situation," Ferrari said while referring to various weather prediction models and satellite images.

    El Nino refers to the extensive warming of the central and eastern Pacific that leads to a major shift in weather patterns across the globe. Dr. Ferrari said several surprise elements might impact India’s monsoon and agricultural output adversely by next year, adding that impact of an El Nino phenomenon was already visible in this year’s monsoon season.

    Indian weather officials say while there were chances of El Nino conditions developing this year, there has generally been no one-to-one correlation between development of El Nino and the performance of the monsoon rains.

    Philadelphia-based Weather Trends International has proprietary forecasting technology that provides forecast on a weekly basis for 4,000 markets in 129 countries to manage "weather risk" for its clients, including fund houses and hedge funds.

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LA NINA TO EL NINO

    "The biggest (weather) trend this year that I would say had me really concerned for Indian agriculture in particular, is that we are on the cusp of a potential monsoon failure, followed by a transition from a La Nina year to El Nino," he said.

    He said the concern was over the "suddenness of the transition" in weather conditions. "This is going to be an especially alarming year." Last week, the Australian met department had observed a sudden rise in sea surface temperature in central and eastern Pacific Ocean.

    According to observations the temperature rise had picked up from June. "As the trends indicate, in July too this is going to be higher," Dr. Ferrari said.  The warming of the Pacific waters is indicative of El Nino conditions approaching. The El Nino weather phenomenon typically repeats itself once every seven years, but has returned this time after a gap of just five years.

    "This is quite early. In fact, in just about five years the conditions have started reappearing. While La Nina conditions prevail for around a year, El Nino conditions prevail for about 12-18 months," he said. During 2007-08 La Nina phenomenon were witnessed, which spelt favourable rainfall in many parts around the globe, Ferrari said.

    "Generally there is a gradual built up to El Nino, but what had us concerned is the sudden rise in temperature of sea water. This is much faster than other years which is definitely unusual and a big concern," he said.

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MONSOON IMPACT

    Dr. Ferrari said there was a definite co-relation between El Nino and Indian monsoon, though there were other factors that impact the quantum of rains.  Referring to two visible transitions in weather conditions which could impact this year’s rainfall, Ferrari said, "This time, water temperature in the Indian Ocean and Bay of Bengal are cooler instead of warm. Warm water facilitates accumulation of moisture in convective monsoon clouds.  "So effectively the change in sea water temperature is resulting in monsoon winds carrying much lesser moisture while moving inland."

   Secondly, he pointed to a relatively strong high pressure system centred around northwest India and progressing towards central India affecting progress of the southwest monsoon currents. "Usually a high pressure area prevails before monsoon appears and it just backs off with the onset of the monsoon currents. This time though the currents are having to go around the high pressure area, and in doing so diverting a fair amount of rainfall from the region," he said.

    Dr. Ferrari said the lingering of the high pressure region this time could be explained as the "dipole impact" of low pressure regions created over Pacific as El Nino conditions develop.

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SUGAR OUTLOOK

    Based on current observations, Ferrari held that the impact of El Nino was already being experienced this year and would become more visible next year. "We see rainfall in India to be at least 15% below normal this year and rains next year could be similar to this year’s level or lesser," he said.

    "This is going to be bad for sugarcane output, especially with a Oct-Sept crop cycle," he added.  Dr. Ferrari who also heads the applied technology and commodity research division at Weather Trends International, said most south east Asian nations cultivating sugarcane would be impacted because of the El Nino phenomenon. But output in Brazil, the largest sugar producer, might not be so severely impacted as the weather in the growing regions would be good, he said.     End

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Transcription errors notwithstanding, the interview highlights the importance of having a second opinion when it comes to a feature as important (economically and socially) as the Indian monsoon.  As it stands, it looks like our Indian forecast will verify; what is more important is that for our clients, this information was available as part of our long range forecast as early as the fall of 2008.  While many are now reacting to the pattern that has developed, taking an early view allows commercial users to be proactive, mitigating some of the unpleasant experiences that many in the market are now suffering through.  

This is another new global mapping capability that is incorporated into our MYskeye  global weather mapping platform.   We have taken global maps that were developed to forecast minimum relative humidity and wind speed/direction, and combined them to construct an index that will be useful to identify global crop regions that may be susceptible to weather induced stress or disease.  One example would be rust, which is a fungal disease that affects numerous commercial crops, primarily soybeans.  While moist conditions are favorable for development, dry windy conditions are precursors for transport, so anticipating these conditions, even within the 14 day window, can be very valuable for growers and traders alike.  The top image in the above map shows the global daily forecast for these parameters.  Users can then zoom in on a continent or growing region of interest and anticipate when and where a potential problem could arise.  These maps are available through a daily forecast for days 1 through 14, and in the near future, they will be available from day 1 through day 335, along with the other suite of Weather Trends forecasts.