SUGAR MARKET UPDATE
Sugar finished 2014 on the back foot and has started 2015 in the same way. Life of contract lows were made in Mar at 14.07 and a small reversal ensued following the straight line move from 15.20 just before Christmas. The Indian crop is moving along at a very swift pace, especially compared to last year, with the ‘failed monsoon’ chatter looking more like hope than reality. There is also plenty of talk of export subsidies, with Pakistan beating India to announce first.
On a slightly more positive note, the CIDE tax and change of mandate for the ethanol blend seem set to go ahead in the first quarter. There is still plenty of debate about the second year aﬀect of the Brazilian drought, and the lack of replant and ongoing husbandry. We are sitting on the more bearish side of this … the replant has been ok and agricultural yields will hold enough, so even with a higher ethanol mix we expect more sugar to made in total. Whilst the next two weeks are forecast to be hot and dry in Brazil, the country experienced good rainfall at the end of last year so here and now the intercrop looks to be progressing well.
CURRENCY UPDATE and What it means for SUGAR
The USD has continued its upward march following the end of QE. EURUSD has moved below 1.20, AUD is sitting just above 80c and USD/BRL is trading over 2.70. The key data risk this week is the US payrolls number of Friday. We suspect even a poor number will do little other than generate a short-term unwind of positions which creates an opportunity to buy USD at better levels.
India and Thailand have seen very little currency depreciation in the last 12 months. Australia and Brazil on the other hand have moved quite a lot. In fact you could argue the majority of the move in sugar last year was purely a currency move and the continued surplus is yet to be priced in. With the stronger USD it is much more problematic to think about commodities in USD, rather the domestic price is what is driving producers. At this point, the domestic sugar price in Australia and Brazil has really not begun to fall, and with the USD continuing to strengthen, Sugar can continue to fall in NY. Chart below : Since beginning 2013, Sugar has fallen 25% in USD (white), 7% in BRL (yellow) and only 3.5% in AUD terms.