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.

October sugar trading at 31.06 this morning (+4%)

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.