On June 22 and 23, I attended the Global AgInvesting 2009 conference in New York, sponsored by Soyatech. This week’s commodity report is a summary of the main themes covered during the two day event.

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As of April 2009, the Food and Agriculture Organization food price index had risen for the third consecutive month. The composite index, comprised of the weighted index values for 55 commodities, has come off significantly since this time of last year and is now roughly in the same territory as it was back in mid 2007. So at this juncture in 2009, do we anticipate a further decline or is this just a resting point before another spike?

The road ahead is somewhat more complex than it might appear upon first glance of the fundamentals at the primary origins. The Economist reports that world food prices are now 2.2% lower than the start of 2008, driven largely by a decrease in the price of wheat. The May USDA World Agricultural Production report is estimating global 2009/10 corn and soybean plantings and production to be equal to or greater than 2008/09, while they expect wheat to exhibit a decrease. With wheat and soybean reductions due to poor weather in Argentina now well documented and priced into the market, and a favorable outlook for Ukraine/FSU production, it would appear that the trend downward could be extended.

May09 sugar futures have been sliding since last week, following market news describing a potential rebound in Indian production coupled with lower projections for crude oil futures. However, $50+ crude is still expensive oil, which makes cane-derived ethanol an attractive option for Brazilian mills. In addition, despite additional sugarcane plantings by opportunistic Indian growers, the longer range weather pattern has not improved for either of the country’s primary cane belts - any increased anticipated production will be limited by water availability.

The WTI current market view (this week’s move into low 12 cent territory notwithstanding) is that the current fundamentals have sugar futures underpriced for both May and July. There is justified support for May09 futures to move back to the 12.55 to 12.9 cent range, and Jul09 shows fair value between 12.85 and 13.2 cents. Out recommendations have stated several times in recent weeks when trading was seen in the upper 13 range, that sugar was overvalued, and profits at those levels should have been taken. Current levels provide another favorable entry point for May.

Just back from the TradeTech 2009 conference in New York this week. Here's a quick recap:

• The mood at the conference is very different from other technical trading events that I have attended in past years, for obvious reasons. There was a noticeable humbling of the 'masters of the universe' attitude that has in the past been so pervasive at these types of events. Many traders I talked to could afford to be away from their screen for the whole day, because 'not much is going on'.
• Despite the point made above, there is still a lot of self-denial in the quant community. Of course there are numerous reasons for decreased trading performance, and quants are not solely to blame, but they surely had a hand in the change in fortunes.
• I found it interesting that one speaker was relentless in saying that it wasn't the fault of the quants. According to this speaker whose name escapes me right now, 'we all went to the same business schools and we all worked at the same desks, and we all built our models using the same methodology, and if we (not me, them) didn't see this coming, nobody could have'.

I agree with the first part of his argument, but I actually think that this is precisely where the problem lies. The fact that they all act / talk / think / dress the same way is the root of the current predicament. If everyone focuses on the same variables, first of all, the opportunity to capture alpha is significantly reduced. Second, when an unexpected event or series of events occurs, their models become useless (ie, models not trained on a similar set of circumstances).

ICE world sugar futures hit 13.25 cents on Friday. Our post last week (as well as many others in recent weeks) stressed the low to mid 12 cent range as a good entry point to increase long positions for March/May, even if only for a short term move.

The grains complex showed more strength last week. Much of this was driven by news of dryness potentially impacting the South American crops. Most of the moisture problems that we have seen are more prevalent in Argentina’s western growing belt. Further, even in areas where soil moisture and vegetative health are currently healthy, the outlook for the next month is highlighting the potential for crop impacts.

The general outlook in Argentina for the next month is for warmer and drier conditions to dominate, relative to last year’s pattern. This is particularly noteworthy for the corn and soybean crops; corn is transitioning from silking to filling, and beans are in the vegetative to flowering stages – additional moisture and low heat stress are important factors for both crops over the next 30 days. Rains over the weekend may ease some of the pressure in the short term, but the longer term pattern still highlights the potential negative crop impacts, and further reductions to crop potential.

Ahead of the next USDA release, I ran some quick numbers and feel pretty comfortable with an estimate of 170-171 mm boxes (the Florida ‘all-orange’ number). The following reasons support this:

• Weather has been better than last season. Very little frost threat in January and the outlook appears to be favorable looking into Feb.

• A better moisture pattern is being seen by the growers. Groundwater levels have started to recharge, and weekly rainfall totals in Dec. have been higher than last year and normal. Further, the outlook for weekly rainfall looks favorable during pre-bloom and bloom temperatures for the start of the bloom period (Feb. into early March) look to be a positive for growers.

• There is some dryness still in western FL, but if we look at the major producing counties, the moisture profile has improved substantially.

• Better bloom weather can push my numbers up a bit more, and I can re-evaluate during mid-bloom.

I think most of the recent activity that is supporting strength in FCOJ futures is a reaction to the steep decline that we have seen over the course of 2008, and more particularly in the last 6 months. Prices have gone from the mid 130s (c/#) down to below 70 in less than 6 months.

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 yesterday’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 Tuesday 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.

ICE sugar futures dropped to their lowest trading levels since early June, with March09 dropping to the mid 11 cent range on Wednesday, before showing some strength and closing just above 12 cents. 

Wednesday’s dip should have been bought, and any future moves that put the nearby around 11.5 cents should be viewed as an entry point for March.  While our long term fair value range for Mar09 is 12.7 to 13 cents, and current levels are overvalued, other factors may put some more downside pressure on sugar in the short term, so there may be opportunities in the coming sessions to take advantage of lower levels. 

Last week’s lower max temperatures combined with cooler evening temperatures resulted in a light week for US cooling demand. The US population weighted number for the week ending 16 Aug was 54 CDDs, which is -15 vs. normal and -33 vs. last year (same week).

More important than the overall US number is the regional breakdown; the weekly CDDs vs. normal were -21 for New England, -29 for the Mid-Atlantic, -35 for the East/North-Central states and -24 for the West/North-Central States (-9, -28, -53 and -59 vs. LY, respectively).

A combination of cooler weather in the central and eastern combined with weaker fundamentals including overall demand destruction continue to exert downward pressure on energy prices last week (September Crude/NG), and this bearish market sentiment carried over into Monday and Tuesday’s trading on NYMEX, before the inventory report moved the market back up a bit on Wednesday. 

Per last week’s weekly discussion, most of the heat was restricted to the west/southwest states, and population centers from the midwest through the east were spared any weather that would have caused CDDs to spike.

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.

This week’s pattern across many of the primary US demand centers is moderately bearish, as most of the heat will be restricted to the Southern Plains and the southwest. Evening temperatures in eastern cities have been pleasant, reducing nighttime cooling requirements across demand centers from Boston through Washington DC.

As the ridge in the southwest retrogresses to the west, the center of warmer air will shift to the western US into next week. This weakening ridge will also allow for more moisture to move into the southern plains and parts of the southeast, as Tropical Storm Edouard (currently making landfall) brings strong winds and a lot of rain to eastern TX and LA.

Why is every analyst jumping on the ‘is China/India growth slowing’ bandwagon now?  The indicators that industrial growth and demand for raw material consumption have been evident for some time now, so the recent flurry of activity surrounding the Asian slowdown should really be a confirmation of what we knew was coming for months, not news. 

That being said, while at the SugarAsia 2008 conference last week, I was very impressed by some of the discussions on alternative fuels.  In this sector, the slowdown may be an opportunity rather than a hindrance.  Not only regarding the developments in India, but also in the way that even small producers were aware of how their crops (sugar, jatropha, small grains, etc) could fit into a future energy matrix that is nothing like the one that exists today. 

The weather pattern late last week provided conditions which spurred some higher cooling demand in pockets around the US, but overall demand requirements were close to normal. 

This week, the placement of a ridge in the east combined with the Bermuda High will produce warmer than normal temperatures across much of the eastern and northcentral US, with daytime highs in the low to mid 90s for much of the week.  Cooling demand from this week’s heat has been partially offset by cool evening temperatures, which have reduced the nighttime cooling demand.  From Wednesday forward, evening lows will be increasing, so we expect higher demand for the second half of the week. 

The end of last week signaled the start to an extended warm spell that will dictate the pattern in much of Argentina over the next two weeks.  While the current week will be warm, the more extreme heat is looking to move into the region next week. 

The chart below shows daily high temperatures and change from last year.  Average temperatures this week in Cordoba will be 17.5°C warmer than the same week of 2007, and 6.3°C above normal.  This pattern could stress the current wheat crop; currently in vegetative state.

A few weeks back in our weekly grains report, we estimated corn yields to be 6-11% below trend (7-year) and soybean yields to be 5-9% below trend, and in addition, highlighted the significant reduced potential for the corn crop.

The weather over the last three weeks has done nothing to help, and the estimates now for corn are 11-13% below trend, and for beans to be 7-10% below trend. This is in line with what was originally discussed in our reports from early June.

A persistent dry pattern is now becoming more of a concern to Argentina’s wheat crop.  As wheat planting is underway, more rain is needed to spur a healthy germination period, and this pattern looks to remain in place for the next two weeks.  No significant precipitation is expected in the region until the week of 22 June.  The table below is a daily precipitation summary over the last 35 days for select regions in Argentina’s grains production region (colors correspond to changes vs. same period last year).  In addition to weather impacts, farm worker strike continues to present challenges for the physical market. (Click chart to enlarge.)

May’s healthy precipitation pattern in Brazil’s Centre-South is extending into June.  Rainfall and soil moisture are wheat planting, and the crop is getting off to a very good start.  Corn (1st crop) and soybean harvest ending without any significant disruptions.

Positive supply news continues to drive the agriculture market, exerting constant pressure on sugar and grains futures. July sugar futures continued trading in the bearish channel from Wednesday of last week through Tuesday (US markets were closed Monday), closing below the 10-cent barrier Thursday. The outlook for global stocks remains healthy for the current crop year, and the weather outlook supports favorable cane production across most of the major origins. Cool water across the equatorial Pacific that is characteristic of La Nina continues to erode, and the warm subsurface water now stretches across the entire Nino region.

Both of these factors are signs that the dominant driving pattern is starting to change phase more rapidly; this highlights a major shift in the global pattern that will influence the current cane crop more heavily later this year, and will have significant impacts (positive and negative depending on geography) for next year's cane and beet crops. Part of this transition where we are between La Nina and El Nino can lead to increased rainfall in coastal Queensland and southern China, while we could start to increase the risk of a drier pattern for Brazil's Centre-South developing later this year during southern hemisphere summer (drier than normal and much drier than last year).