Short-Term Outlook To Help Agri Sector

With May sugar off the board, world sugar for July delivery has started to recover from the drop experienced last week.

July ICE futures slid from 12.15 cents down to below 11.2 cents in trading late last week. Since then, futures have been increasing slowly through early Wednesday trading (opening at 11.80).

News on the supply side helped put downward pressure on futures last week as UNICA's announcement of another record crop in Brazil hit the market. Healthy rains across Sao Paulo's growing region helped as many areas received between 50 and 60 mm last week. The pattern over much of Brazil's Centre-South will turn dry for the next 6-10 days, then pick up again during the week of 18 May. The projected rainfall pattern is helpful for both current and next year's crop; after last week's totals, there is enough moisture to sustain the new crop while it is not too wet as to impede the current crop's harvest.

In addition, the current soil moisture profile is favorable for next year's crop. In the coming months, it will nonetheless be important to remember the rainfall-yield relationship – this may become an issue in the contracts going forward; possibly affecting Octo08 and highly likely affecting the Mar09 futures.

But the crop in Brazil is only part of the story. Balancing out the favorable crop news are the usual ancillary fundamentals.

After posting some strength, the dollar dropped again vs. benchmark currencies. Consistently high oil prices (June crude currently above $122) and reductions in US corn acres due to planting delays both make ethanol more attractive to Brazilian millers. This has the potential to divert a higher percentage of cane away from sugar production in favor of ethanol.

Given the current fundamental picture, the Weather Trends short term outlook still maintains that fair value for July World sugar futures falls between 11.6 and 12.1 cents; fair value for October is between 12.5 and 13.1 cents.

On the grains side, April was dry in most soybean areas throughout Cordoba and Santa Fe. At this stage in early May, soybeans (1st crop) are currently in mid harvest. The dry conditions are favorable for harvest progress for both corn and beans, and no significant precipitation is forecast for the next two weeks. In contrast to the drier pattern in Argentina, much of the grain belt in Centre-South Brazil had a very positive rainfall month in April. Looking ahead, the pattern will remain dry over much of Parana for the next two weeks, which is favorable for the corn harvest; some rain will resume during the week of 18 May.

In Australia, the April rainfall picture improved, particularly in Western Australia's wheat regions. The eastern grains areas (NSW) saw a slight improvement in the pattern, but most of the region experienced a relatively dry month.

Given the global scenario in sugar and grains, combined with supply situations in the grains complex, we maintain a view for upward support in ag-related ETFs and equities.

Disclosure: No positions.

Comments

[mangy cat:]

not a mention of the market impact of the farmers' lock-out (or should that be lock-in) in argentina

2008 May 11 02:53 PM