The latest UNICA number has the Brazilian crop running at record levels, significantly above the last year. Ethanol demand is still sluggish, but with a crop that is expected to test the crushing capacity of the entire sector, the ability to switch from sugar to ethanol will be less important for the mills as actually getting the cane crushed. The weather continues to be warm and dry, enabling the cane to come out of the field but some are talking now about the threat to the replant given the dry. It is a very fine balance at the moment; near term there an abundance of cane. Dry weather is needed to get the crop oﬀ, but rain is needed for the replant. It could well turn out to be a crop of “two parts” with the second half of the crop causing concern for investors due to the replant.
India is another country we are watching closely. Whilst the upcoming monsoon is predicted to be 109% of the long-term average, currently Maharashtra is experiencing 40+ degree heat with no rain. The north east of Thailand is experiencing similar weather. This isn’t new to the market, but is still worth keeping a close eye on. Decent rain in either of these countries at the right time will open the way for a much larger crop the following year.
The spec position for the week is back to near-record levels at 210k longs.
CURRENCY / MACRO COMMENTS
The RBA sprang into action this week with a drop in the overnight cash rate to 1.75%, a record low. The currency, whilst initially rallying into the meeting sold oﬀ 3% in the next 12 hours to be sitting back at 75c. The trigger for the move was a very low inflation print, but more importantly was the broad-based nature of inflation being too low across many sectors. The bank will have had access to the Statement of Monetary policy which will be issued on Friday. Growth and inflation forecasts are expected to be downgraded now. The market now has another cut priced in by the end of the year. Given the lack of stimulus in the budget it is fair to assume another cut will be needed to stimulate the economy. A lower currency, higher growth or higher commodity prices will ease the pressure to cut, and a reignition of the housing markets in Sydney and Melbourne will once again increase the hurdle to another cut.
The recent run up in commodities (corresponding with the USD sell oﬀ) is now rather mature and a period of consolidation or pull back is now expected.