July Sugar made life-of-contract lows (just) at the end last week falling below 12c, although has failed to stay under that level, rallying back to 12.30 on Monday night. At the end of trading last week the Commitment of Traders (CoT) report was released showing the specs had turned from a small long position into a medium-sized short in the space of a week. Lower volumes and lack of producer interest suggests this group of investors was the majority of the selling last week. It is hard to see significant further losses from here until greater clarity is known about the Brazilian crop.
As previously mentioned, the El Nino has been linked to higher rainfall making the mechanical harvesting of the crop more diﬃcult. Without the rain, a very large crop is expected (with potentially more in the field than the mills can crush). Rainfall in the second half of May has been much closer to ‘normal’ with only two days lost to rainfall (compared to 4–5 in the first half of May).
A key driver of the potential sugar mix from Brazil is ethanol price parity. Sugar producers are able, to some extent, switch to whichever is paying best. Ethanol is quick to sell and get cash immediately so is good for cash-strapped producers. Sugar on the other hand can be hedged (and with the positive shaped curve and high interest rates) much better levels can be gained and future production can be hedged for those with access to credit lines. Ethanol parity is a function of ethanol supply and demand as well as the currency (USD/BRL). At the moment ethanol is paying just over 12c leaving producers somewhat ambivalent to move sugar production across to ethanol. We will continue to watch this closely for an early read of the sugar supply to come from Brazil.
The USD found good buying across the board as the Greek debt situation weighed on EUR. USD/BRL pushed back to the middle of the range at 3.17 as the market digested the conflicting signals of a government that is grappling with significantly higher interest rates and inflation that is still running above the central bank’s target level.
KEY POINT : Joaquim Levy, the Brazilian Finance Minister, has been a source of credibility for the popularist government. His hard line banking background has given the market the sense confidence the right (tough) decisions will be made. There has been some recent strain in the relationship between Levy and the Prime Minister Rouseﬀ. If Levy were to resign (or get sacked) the market would take this as an unambiguous negative, pushing the currency lower. This has immediate implications for ethanol parity and will result in a lower sugar price all other things being equal.
AUD/USD has moved towards the lower end of the recent range in line with the broader USD buying. Given the two cuts by the RBA already this year, we will see policy will remain on hold for the nearby future, and the currency will be a function more of global issues than domes conditions.