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(March 21, 2002) SUGAR: Price direction in the sugar market has become increasingly two-sided since the market bounced off contract lows made at the end of February. The rebound was attributed in part to speculators lightening up on a sizeable net short position. Additionally, we suspect this change of heart among speculators was also fueled by a greater wariness of a developing El Nino. As discussed in the previous edition of Futures AGE, El Ninos are often associated with drier than normal weather in Southeast Asia, eastern Australia and India while wetter than normal weather is often found in southern Brazil.

Although an El Nino has not been officially declared, some of the symptomatic weather phenomena has already been noted in Brazil's key center south producing region, following well above average rainfall during the January-February period. This raised concerns that should the heavy rains continue, this could result in lower output and harvest delays. The more bullish argument though is that harvest delays would make it difficult for Russia, the world's top sugar importer, to import sufficient quantities of Brazilian sugar in time to satisfy shipping constraints stemming from Russia's import quota regime. The Russian government has in place an annual tariff rate quota system for raw sugar imports of 3.65 million tonnes of which 3.35 million tonnes are due by the end of June with the remainder to be filled during the fourth quarter. Brazil's center south sugarcane harvest normally begins in May, but due to the sheer size of this year's crop, harvesting is anticipated to begin in April. An earlier Brazilian harvest would increase available supplies making it easier for the Russians to meet import deadlines.

The concerns about potential harvest delays have subsided with the return of hotter, drier weather in Brazil's center south region, and futures have weakened as a result. This situation is still tenuous as much depends on Brazilian weather. Rising production estimates from other sugar producing countries such as Thailand and South Africa have also dampened bullish sentiment. Another factor that could be pressuring the market is the uncertainty over when China will release its quota allocation for sugar imports. Aside from Russia, China is expected to be one of the heavy hitters in terms of sugar imports this season. Some newswire services are suggesting an announcement could be made this week while others quoting Thai sources imply a decision may not be forthcoming until next month. Aside from some token physical business from the Middle East, buyers, in anticipation of weaker prices when new-crop Brazilian sugar begins entering the pipeline, are holding to the sidelines. We think the combination of rising production and limited buying interest is feeding into a more bearish price environment going forward.

 

Andrew Buderus

www.agedwards.com

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