Sugar Supply Concerns Developing: Affect on Commodity Markets

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 were neutral.

With higher sugar prices on the world market, large South American producers such as Cozan (CZZ) will be in a strong position, particularly when March09 becomes the nearby futures contract.

Disclosure: The author has holdings in DBC and DBE.

Comments

[tylakewalker:]

Great information/summary. Thanks for posting this article.

2008 Aug 08 11:07 AM