The No.11 market saw the strong surge that we have been anticipating this week, with ICE March-16 futures closing Tuesday’s session up 10.88% at 14.0 and May-16 up 8.31% at 13.82. Readers of our Risk aWhere weekly reports are well aware that we have been warning of a potential reduction in the consensus estimates for 2015-16 physical availability, and with the International Sugar Organization’s (ISO) revision to their balance sheet, our long-term outlook is starting to verify. The ISO increased their projections for the global sugar deficit in 2015/16 from 3.05 mmt (from the November 2015 update) to 5.02 mmt. It is unclear whether this is the catalyst for the reversal to be sustained , but a one day move of this magnitude sends a very strong signal to the market as analysts revise their physical and financial expectations for the remainder of 2016.
With everyone focused on Brazil, we look elsewhere to spot inefficiencies in the market. The histograms below show the P/PET crop stress index for sugarcane regions in India and Thailand for the 30 day period ending 19 Feb. The risk index is a measure of plant activity and water cycling, so positive index values are indicative of healthy sugarcane growing conditions, and negative values are indicators of stress. As the graphics show, we are looking at a potentially stressed crop, which will affect both production numbers in 2015/16 (Oct/Sep) as well as 2016/17.
Further, when we look at what the indices were reporting last month, we see that this potential crop stress was a system in development, as the histograms for the 30 day period ending 08 Jan below demonstrate. One of the factors that Risk aWhere analysis emphasizes is the identification of early warning signals where crop stress in key commercial commodity origins can be identified earlier than if we were to employ more traditional methods. The current market and crop activity in world sugar underscores why this approach has merit.
As we have been writing in our market commentary, the broader market sentiment in the commodity sector has been overtly bearish, we see signs of strength in sugar. As the market has appeared to be waiting for a signal, some of the recent information that was not priced into futures may be reflecting an adjustment in market expectations, and readers who capitalized on extending long positions when prices were lower are likely in a very favorable range today. The fact that spot sugar futures have been trading in a generally sideways to down market since November, reveal a strong opportunity to enter March and July positions at current levels, as we think that there is still more upside potential in this market. We agree with the general market sentiment, but feel that there is some information, based on our analysis, that is not fully priced in and will trigger some additional support over the next 60 days. Even though we are off of the lows of September, we still see a contango situation through 3Q16.
Most of the commodity wires are now filled with analyst expectations of a larger global deficit in large part due to a reduction in yields that materialized during the first phase of the current fading El Niño pattern. Although Brazil as a whole has seen a generally favorable pattern, most of the positive conditions have been evident across the primary Centre-South growing region (mainly São Paulo state). However, in a year such as this when the global Supply-Demand balance is again in negative territory, the secondary North-Northeaste region of Brazil almost acts as a ‘swing country’, where output, in conjunction with other smaller origins, can make the difference between a global surplus or deficit. Beyond (northern) Brazil, India and Thailand, we see additional supply risk leading to further price support in Australia, Central America, Egypt and the EU (beet). In aggregate, potential reductions in production/lower yields can not only increase the size of the current (2015/16) deficit, but also carry over into the forthcoming marketing year’s supply.
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