Sugar Futures Drop, Fundamental Picture Currently Ignored
Michael Ferrari, October 10th, 2008
http://blog.commodityweather.com/
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.
The Brazilian real has weakened further; this factor combined with lower crude prices which ease the demand for cane ethanol in Brazil (shifting additional production capacity to sugar) are bearish signals for world sugar prices. This also makes for a nice entry point into companies such as Cosan LTD. (CZZ), who will benefit from exports with a stronger US dollar, as well as lower domestic production costs. They have taken a slide since September, so it may be a nice opportunity in the $4-5 range.
Also in advance of today's USDA crop report, consider the commodity ETFs (DBA) and (DBC). Short term bearish behavior notwithstanding, we still need to keep in mind that the longer term fundamental outlook is for additional support for constructive conditions in the sugar market. Physical tightness and lower carry over stocks will be factors that will gain more importance in the coming months, and should be reflected in futures as we move through 4Q08, all supportive for CZZ.
Daily activity in futures (in most softs) is currently divorced from the fundamental picture, and at some point, we feel that the factors on the supply side of the equation will start to figure into Mar/May09 more prominently. We have discussed in many previous notes that Brazil will still have a healthy crop, but dryness will shave some off of the final yields. Further, we have been talking all summer about weather related limitations to the Indian cane crop, and these reduced numbers for both the current and more importantly next year's crop will start to be figured into analysts' estimates.
Michael Ferrari is the vice president of Applied Technology and Commodities Research at Weather Trends International. He directs the research and product development efforts in support of the global commodities sector. He has several years of research experience which span the theoretical and applied domains of the geophysical and biophysical sciences. Before joining WTI, Michael was a commodity research scientist and trader where he was primarily involved with global climate forecasting, remote sensing analysis and algorithm development, applied technology research, and commodity analysis/modeling. All of these areas come together to support trading platforms in the agriculture and energy arenas. He has a PhD from Rutgers, where his research focused on climate geophysics and evolutionary biology. He has also earned his BSc in Applied Economics. Michael has published and presented research findings in several areas, including global climate modeling, pattern recognition, biometeorology, environmental metagenomics, and climate economics.
