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Weather Trends Indian Monsoon update

|Includes: PowerShares DB Agriculture ETF (DBA), DBC

Here is the Weather Trends summary of the Indian Monsoon 2010 season to date.  A better start than last year, certainly, but as we have been stressing in numerous previous posts (see last week's note as well as our note from early July), there will still be moisture problems that will curtail the sugar production 'rebound' that many in the market have been expecting.  This is particularly notable as it pertains to the growing regions in the northern states.  The graphic below is the Weather Trends recent weekly forecast for year-over-year precipitation (in bars) and the solid line depicts the observations, starting in early May.  This is a crucial time for moisture for the sugarcane crop, particularly as it pertains to total sugar extractable yields; a little dryness later in the season actually serves to boost sugar yields (as a function of total tonnage), but mid July is too early in the growing cycle for dryness to set in. 

If one were to only look at the satellite maps, it would appear that the entire subcontinent has plenty of moisture available; however, while clouds are forming, they are not precipitating where it is needed most, and the sugarcane regions in Uttar Pradesh, Bihar and parts of Maharashtra may be at risk.  Some areas in the south are also starting to see rainfall scale back as well.  The map below is the seasonal totals through Wednesday 21 Jul, as published by the Indian Met Dept.  We can see that there are deficiencies in the noted regions, and while there is still quite a bit of time left in the season to improve, we believe that it will be a struggle for India to produce the kind of sugarcane crop that the market has been expecting.  Recent estimates from the Indian Sugar Mills Association for crop sizes of 18.8 mmt and 25 mmt for the current and coming crop years (Oct/Sep) may be hard to achieve, as the current year's pattern will still have ramifications for the start of the next crop via lower soil moisture.  Vegetation stress and decreased plant vigor are already being documented through our research as a result of analyses of satellite derived vegetation indices for key producing regions.

In the weeks to come, we are expecting some improvement, but hold our concerns that the market is pricing in better crop expectations, and therefore we anticipate continued support for ICE sugar futures to remain above the 18 cent range. 

Disclosure: none