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.

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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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)

March09 ICE sugar futures showed some strength early in the week, moving up about a cent (11.2 to 12.2) before trading down in the mid to upper 11 cent range by late Tuesday (closing at 11.71). Technicals support a slightly lower open on Wednesday. The US dollar slid some more against the benchmark currencies, and this is lends some price support, however, a stable supply outlook and good weather for harvesting cane can limit movement on the upside. WTI still maintains that dips on March09 in 11.1 to 11.5 cent territory are viewed as attractive entry points, as our longer term expectations are for gradual support for futures prices.

A weaker dollar will make physical sugar purchases an attractive to buyers with stronger currency position. With no significant issues in Brazil (which can of course change quickly), some pressure can be taken off of the world’s largest producer. Lower crude and subsequent decreases in the grains complex (soybeans and wheat closed lower; corn was mixed) will ease the sugar supply situation, allowing more diversion of cane to sugar production. Readers of our grains reports will note that our extended outlook for the grains complex is however constructive to the market, as we feel that the recent WASDE has overestimated yield potentials in the US and other major origins, and this should lead to a reversal in the market later in the year.

In spite of favorable weather in Brazil, the wildcard this year will still be India. More news of the extend of the short crop in India is now in the market; a factor that we have been discussing all summer, and we addressed this topic in more detail during our monthly market call earlier this week. Global sugar inventories may not match the higher global demand for the start of the Oct/Sep 2008/09 crop year; with a smaller Indian crop this year and next year, March, May and even July 09 futures will start to see additional support as we move towards the end of the calendar year. The next WTI monthly commodity review will be held the first week in November.

The last five days have seen MAR09 ICE sugar move down about a cent from the mid 14 range to just above the mid 13 range (see chart above). Our target price range for fair value March sugar is just above 13 cents, so we feel that the current trading range is slightly overvalued. The current weather pattern in Brazil’s Centre-South, while slowing the current harvest, will still be beneficial for the start of next year’s crop, although slightly warmer temperatures would be a more favorable pattern for the C-S. The market has also been reacting to news of next year’s crop in Brazil. We mentioned last week that there were fears of tightness in physical supply, leading to higher support levels for the MAR09 contract. The International Sugar Organization has recently stated that their expectations for Brazil’s 2008/09 production will be higher due to a weaker Real, lower crude prices and lower domestic production costs, encouraging more sugar production (over ethanol). The market took this as a positive supply signal, and futures have softened. Our outlook agrees that while the situation in Brazil is still a healthy one, but we feel that the uncertainty surrounding currency strength and energy futures are not solid grounds for speculating on the direction of sugar. Brazil might have a healthier supply situation than previously thought, but the situation in other origins is not as favorable. We are still expecting conditions to limit production and yields in Australia, India, and now Thailand for next year, and this will serve as support in the coming months. Even though our stated range is below the current market, these longer term factors are bullish for March futures. If we see retracements to the low 13 cent range, this may be an attractive entry point for March. We encourage subscribers to view our long range outlooks for weather and crop assessments at the major origins (sugar, grains, energy), to start identifying opportunities for 2009.

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.