April Showers Bring Higher Futures

For those following the agricultural commodities and associated ETFs, April is around the corner, and attention will start to turn to turn to the precipitation pattern in South America. Particular focus will be on the Centre-South region of Brazil as nearly 2/3 of Brazil’s cane is grown in Sao Paulo state, in an effort to speculate on where sugar futures might move from their present levels. At the time of this writing, March08 ICE sugar futures are trading at just above 14 cents, and May08 is at 14.38. These are the highest levels that sugar has traded since July06, and at that time, sugar was on the way down from its prior run up to 18 cents.

While futures are high, there still could be some more upside potential on prices in the near term. Weather Trends International research has shown that April rainfall is very important to the yield potential for both the current crop and next year’s crop. Current crop yields are boosted with some late crop-cycle growth, which from a yield perspective is supported by slightly drier conditions, before sugar production starts to taper off ahead of harvest. And early plantings get to build up sugar reserves in slightly dry weather, which is needed to get a good start in their 12-18 months in the ground before the first cut (sugarcane is a grass). So the weekly April rainfall outlook for the C-S looks like it may be a slight problem for sugar yields. When comparing to last year’s good April pattern, the bias in on the wetter side in cane growing regions, and while this may be counterintuitive, it is not the most favorable pattern for cane. The rainfall comparisons with the longer term normal are not as relevant.

The precarious nature of agricultural commodities is making this year quite interesting. In addition to all of the other pressures from food inflation, biofuel demand, crude, and the weak $USD among others, weather could prove to be the wildcard this year. Sugar/grains prices are high, partially reflected by recent performance in the Multi-Sector Commodity ETF (DBA), iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA), and Market Vectors Global Agribusiness ETF (MOO), which all have significant exposures in each of these categories. So watch the South American rainfall pattern closely, because 2008 could really be full of some surprises to those not taking a long term view.