Raw sugar futures surged to a 17-month high on Tuesday, helped by a rallying Brazilian currency and some wet weather headed for the country’s cane belt, in a market that is starting to get twitchy over the pending supply deficit.
Nick Penney, senior trader at Sucden Financial, noted that weather reports from Brazil’s key Centre South cane belt were pointing to rainy weather to come, which could delay cane cutting.
This was always going to be the issue once mills in Centre South Brazil decided to begin the harvest early,” Mr Penney said.
‘Not a lot of sugar delayed’
True, other commentators warned not to overstate effect of the damper outlook.
“South Brazil weather presents a mixed picture as the South Brazil harvest begins to ramp up,” said Tobin Gorey, at Commonwealth Bank of Australia.
“Much of the region, though it is by no means dry, has dried considerably from where it was fortnight ago,” Mr Gorey said, although North‑eastern Sao Paulo remains “somewhat soggy”.
And despite the expected wet weather, Mr Gorey noted that early crushing was likely to be both modest, and heavily slanted toward ethanol, rather than sugar production.
“Consequently, wet weather is not delaying a lot of sugar.”
But Mr Penney warned that the market had little room for any shortfall in Brazilian production, as expectations of global deficit increase.
“Given reduced forecast production numbers in other areas around the globe, Brazil will once again bear the weight of expectation coming into a year where continuous upward revisions are being made to the forecast deficit between production and consumption,” he said.
As pointed out by Robin Shaw at Marex Spectron on Monday, the idea that ample global supplies would cap a rally seems to be retreating.
“Years of surplus have indeed contributed to stock build up , but high domestic prices in traditional importing countries may reduce the availability for exports at least until world prices are higher,” said Mr Penney.
“The market seems to be finally waking up to the realization that things could get tight, especially if the weather in the biggest exporting area continues to be changeable and affect production.”
Further support for sugar came from a strengthening Brazilian real, as markets saw upside in the travails of President Dilma Rousseff, who is facing impeachment.
A stronger real is bearish for sugar futures, as it lowers real denominated sugar prices, discouraging selling end encouraging mills to divert cane to ethanol production.
The Brazilian currency gained on the dollar, following reports that the Ms Rousseff’s Workers’ Party is about to lose a key coalition ally.
The move increases the likelihood of a new Brazilian government, which markets are investors are hoping will bring an end to the economic freefall seen over Rousseff’s leadership.
Coffee gets boost as well
The real reversed early losses on the news, trading up 0.5% against the dollar in afternoon deals.
May raw sugar in New York settled up 1.8%, at 16.58 cents, the highest for the front month contract since October 2014.
Brazil is also the world’s top coffee grower, meaning the real was supportive for coffee as well.
May arabica recouped the previous session’s losses, up 2.4% 134.65 cents a pound.
May robusta coffee settled up 2.8%, at $1,514 a tonne.
Brazilian farmers to feel the pinch?
The strength of the real was bullish for soybeans as well.
“Often times, the currency exchange rate has a bigger impact on Brazilian farmer’s profit margin than the actual international price of commodities,” noted Dr Michael Cordonnier, at Soybean and Corn Advisor.
And in Argentina, another major exporter of soybeans and soybean products, the currency hit a two-month high, at 14.10 to the dollar.
The peso trimmed gains later in the session, trading up 0.5% against the dollar, at 14.28, in afternoon deals.
Cheap loans may be on way out
And Dr Cordonnier warned that the annual farm programme, which is usually announced in April or May, might bring further threats to farmer’s margins.
“That program consists mainly of production loans either with subsidised interest rates of 6-8% or nonsubsidised production loans with market interest rates, which today are in the range of 20-25%,” he said.
“No concrete details have been announced concerning the 2016-17 harvest plan, but when the plan is announced, I don’t think it will be good news for Brazilian farmers,” he warned.
Dr Cordonnier left his forecast for Brazilian soybean production unchanged, at a record 100.0m tonnes, with the harvest 61% complete.
Palm lends support
The vegetable oil markets are adding support to soyoil.
Palm oil futures in Kuala Lumpar hit a two-year high, as worries about El Nino related dryness in South East Asia persist.
March soyoil futures closed up 1.0% at 33.93 cents a pound.
And soymeal futures were up as well, gaining some support from the strong peso, as Argentina is the top soymeal exporter.
May soymeal futures in Chicago closed up 0.9% at $271.0 a short tonne.
Technical selling added more support to soybeans, as the front month futures contract broke through the 200-day moving average for the first time since August last year.
The underlying strength and volume continues to be in the soybean complex,” said Darrell Holaday, at Country Futures.
May soybean futures finished up 1.0%, at $9.10 ј a bushel, after hitting $9.14 a bushel, a 5-month high for the front month contract.
Wheat gains from cold snap
Wheat futures extended the previous session’s gains, as markets continued to ruminate on the effects of the weekend cold snap.
US Department of Agriculture crop reports released late on Monday suggest wheat was at vulnerable stage of development during the recent cold snap in the Southern Plains.
Weekly crop data for Kansas showed 20% of wheat had reached the jointed stage, compared to just 3% at this time last year, and 7% on average.
Don Keeney, at MDA Weather services, told Agrimoney he expects damage across around 10% of the wheat belt, with 2% seeing “major damage”.
The biggest gains were for Kansas-traded hard red winter wheat, the variety grown in the affected area.
May Kansas wheat closed up 0.6%, at $4.88 ј a bushel.
May Chicago wheat rose 0.2%, to finish at $4.66 ѕ a bushel.
But May corn futures trimmed gains, after an abortive attempt on the 200-day moving average, ending the day flat at $4.71 ѕ a bushel.
(Source – http://www.agrimoney.com/marketreport/pm-markets-sugar-extends-rally-to-17-month-high—3555.html)