The Hightower Report

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Commodity markets in general are showing a positive tilt overnight but sugar is not. The reversal from a six-month peak along with ideas that congestion is easing at Brazil ports helped to pressure. In addition, cooler and rainy weather is moving into the Russia and Ukraine producing areas which is seen as a negative development. October sugar closed lower on the session yesterday after trading at the highest level since March 1st. Trade remained choppy in New York while London played catch up with Tuesday’s late run in sugar. Traders await official monthly production updates from Brazil for release today but there is some expectations that dry weather in Brazil this harvest season could cause yields to begin to decline for the tail end of the crop and that there may be revisions lower from previous expectations. The International Sugar Organization sees a world production surplus of 3.22 million tonnes for the 2010/11 season as compared with a deficit of 4.95 million tonnes last year. Rains in Russia this week may not reverse losses expected after severe drought conditions in August but at least this may be seen as a reason to suspect that the production potential may at least stabilize. Traders had been expecting record sugar production of near 4 million tonnes before the drought but the Russia Sugar Producers Union has lowered their estimate to 3.2-3.3 million tonnes and some private forecasts have dipped as low as 2.8 million tonnes. India weather remains favorable for a large crop.

TODAY’S GUIDANCE: The reversal from six month highs may be seen as a negative technical development and some rains in Russia and talk of easing congestion in Brazil may be factor to encourage speculators to liquidate part of their large net long position. Resistance for October sugar comes in at 2016 with 19.28 and 18.94 as initial support.

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If outside markets were to signal some short-term weakness in commodity markets, sugar looks vulnerable to a significant downside correction as speculators continue to hold a massive net long. Keep in mind, the large and small specs combined held a net long position of 148,950 contracts in the last COT report which is a historically high level and last years high prices might translate into higher world production ahead. In fact, even last year’s major world importer, India, is exporting white sugar on the world market for the first time in two years. India is offering sugar on the market at $90 premium to the London white futures market which is well below Thailand offers near $200 premium. Thailand offers hit a peak near $250 premium in July. Traders see India production near 25 million tonnes this season from 18.8 million this past season and compared with consumption which is thought to be near 23 million tonnes. Recently, however, there is talk that India production could be even higher with trade house rumors this week indicating that key producing regions in India saw a jump of up to 35% in planted area. October sugar closed moderately higher on the session yesterday and near the highs of a 64 point trading range. Futures were sharply lower early in the day under pressure from weak commodity and energy markets and choppy trade in the US dollar. The market is continuing to find supply concerns out of Europe and Eastern Europe/FSU beet growing regions and from ideas that import demand will increase in this region and from Pakistan import demand as well. There is also increased talk, however, that India will be supplying white sugar to Pakistan this year. Talk of the potential oversupply from India and Brazil helped to pressure the market early.

TODAY’S GUIDANCE: While the market has inched back up to near the early August highs, the supply fundamentals seem to be shifting more toward the bear camp as tightness in India supply has shifted to the country moving to an exporter for the first time in a few years. The market is also in a very overbought condition when looking at the spec net long position and if India production is higher than expected, fund and speculative longs might begin to search for other markets to “buy and hold”. Resistance for October sugar comes in at 19.60 and a move back under 19.18 might be considered a negative technical development. Key support is back at 18.22 and then 17.15.

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The market does not seem to have the longer-term supply/demand fundamentals to see an extension of the May to August rally as most traders see a world production surplus this year. Pent-up demand for new crop Brazil sugar late this spring and into the summer has supported very active exports from Brazil which reached a monthly record high for July. However, Brazil is also in a position to see record production this year with cumulative production since the start of the season near 30% higher than last year’s pace. October sugar closed moderately higher on the session yesterday and managed to see strong gains off of the overnight lows and solid gains from the early session lows. Continued fund buying in many commodity markets despite the sharp rally in the US dollar helped to support the recovery bounce. In addition, traders see the backlog of ships waiting to load sugar out of Brazil as a sign of strong near-term demand. Central American countries saw production for the 2009/10 season reach 4.43 million tonnes, up 5.5% from last year with exports running 6.3% higher than last year. There are no estimates for new crop production but given the sugar price in the past year and a higher level of profitability, producers have the incentive to boost production again this coming season. A recovery from two years of poor production out of India would suggest that world production will exceed consumption for the 2010/2011 season and India weather appears to be improving recently.

TODAY’S GUIDANCE: Short term demand could ease soon and the market is technically overbought. The outside day down seen on Monday would suggest that a top may be in place.

TODAY’S MARKET IDEAS: Selling resistance for October sugar comes in at 18.97 with 18.22 and 17.15 as initial downside support.

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The highest close since March 8th for October sugar along with positive influences from outside markets could attract increased buying support. The Indian monsoons are picking up steam for the monsoons, and traders see a continued good rain volume there as a potential negative force. However, short term demand news and speculative buying has helped support a steady short term uptrend. The market closed sharply higher on the session yesterday but the rallied failed to take out Friday’s highs. October sugar in London also closed higher with an inside trading day, as the strong spot demand for sugar and long lines to load at Brazil has helped support. Positive action in the US stock market along with weakness in the US dollar added to the bullish tone. Talk of rains at the ports in Brazil, which might slow the loading process, was also seen as a positive force. The COT reports on Friday showed that trend-following funds were net buyers of 3,318 contracts for the week ending July 20th, increasing their net long position to 64,343. Commodity index traders were net buyers of 3,867 contracts for the week, and the fund buying trend is seen as a short term positive force. The India Sugar Mills Association indicated yesterday that sugarcane planted acreage for the 2010/11 season has jumped to 5.28 million hectares, up 18.6% from last year.

TODAY’S GUIDANCE: The technical action remains positive with futures remaining in a tight and well defined uptrend. We question the ability of the market to see too much follow-through to the upside as the end user demand becomes saturated, but there is still no major sign of a top. Support is 18.27 for October sugar with resistance at 19.29. It will take a move under 18.09 to sour the chart outlook.

TODAY’S MARKET IDEAS: While a bit overbought, there is still no sign of a peak. Watch for bounce to at least 19.29, but the market may run out of positive news soon.

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Speculative short-covering supported a bounce in July sugar but other months were under heavy selling pressure from significant weakness in outside markets. October sugar saw follow-through selling pressures from the weak technical action Monday and bearish outside market forces dominated the trade psychology yesterday. October closed sharply lower on the day and quickly pushed through 15.53 support to close at 15.28. A 50% correction of the May to June rally provided some support at 15.17. Talk of the overbought technical condition of the market, a sharp break in the stock market and weakness in energy prices help spark speculative selling pressures for much of the session. Ideas of more global economic weakness ahead after a recent string of poor economic reports helped to pressure most commodity markets. With a big premium of July over the October futures, traders see small deliveries against the July contract of less than 10,000 contracts. Ideas that the China growth outlook is declining and the collapse in energy prices were seen as especially negative forces to the sugar market. Thailand may need to import near 100,000 tonnes to replace sugar already sold due to strong domestic usage. Pakistan issued a tender to import 175,000 tonnes of white sugar. China will auction off 100,000 tonnes of state sugar reserves on July 6th in an effort to ensure sufficient supply and stabilize prices.

TODAY’S GUIDANCE: Strong demand in the cash market and a backlog of ships waiting to load out of Brazil are positive forces but specs hold a massive net long position and speculative long liquidation could be the dominant force over the short-term.

TODAY’S MARKET IDEAS: Short-term resistance comes in at 15.53 with support coming in at 15.17 and 14.82.

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With a positive demand tone for Brazil sugar and the market still recovering from one of the tightest ending stocks situations in a few decades, the market seems to be in a position short-term to continue to move higher. Traders expect a world production surplus for the coming year but Brazil is the key producer and exporter at the moment and there also seems to be plenty of pent-up demand from end users who tried to avoid high prices last year. The world production surplus is not expected to be burdensome and it will be important to see surging production from India to see the surplus materialize. The market closed slightly lower on the session yesterday but well up from the lows. It was an inside trading session with a relatively tight range. The firm US dollar and ideas that the market is slightly overbought after the surge higher on Monday helped to pressure. News that Egypt made inquiries for 100,000 tonnes of raw sugar was also seen as a factor which might have helped provide some support. Bangladesh bought 10,000 tonnes of sugar at a tender this week. Mexico sugar production for the season so far is running 3% under last year. Russia has now refined 1.3 million tonnes of sugar from imported raw sugar so far this calendar year which is up 25% from last year after active imports in the spring. Philippine officials may increase their planned additional imports for the current season to near 150,000 tonnes from 100,000 as a previous estimate. The country suffered from El Nino dryness this past season which pulled actual production down to 1.97 million tonnes from the initial forecast for 2.18 million tonnes. The extreme tightness in Thailand and near record cash premiums has caused Indonesia and other importers to turn to Brazil for near-term supply and Brazil sugar is trading at a premium to the board. Eventually, Brazil production may saturate demand but for now, the short-term demand appears supportive.

TODAY’S GUIDANCE: In a somewhat surprising development, India officials indicate that mills have signed deals to import 319,925 tonnes as traders take advantage of lower world values. While India expects production to be above consumption this season, the country may be an importer early this season and an exporter late. The short-term trend looks to remain up.

TODAY’S MARKET IDEAS: Support for October sugar moves up to 15.71 with 16.64 and 17.15 as next upside targets.

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August white sugar futures in London managed to push to the highest level since March overnight and strength in other commodity markets on less focus on European debt situation and more focus on potential growth in demand from emerging markets has helped support the rally this week. The strong gains in energy prices and news that ethanol production in the US is on the rise added to the bullish tone for the market. October sugar closed slightly higher on the session yesterday but well off of the highs. The market found support from outside forces with solid gains in energy markets, a strong rally in US equities and a sharp break in the US dollar helped to support. The USDA supply/demand update and a firm demand tone for spot sugar helped to provide some support. For the 2010/11 season, US ending stocks are expected to decline to 764,000 tonnes from 844,000 in May. This compares to 1.15 million tonnes for 09/10 and 1.499 million in 08/09. This may lead to increased import demand from the US for the coming season. Supply news is mixed as Brazil continues to see a surge higher in production for the coming season and weather remains favorable for cane harvesting. Industry executives in India have reported that 2009/10 sugar production in India could reach 19 million tonnes which is up near 3 million from expectations earlier this year and up near 1 million from recent views. Tightness in India was expected to be a driver of the market earlier this season but a steady revision higher in production since last fall has helped to ease tightness concerns. China tightness may take over in the 2010/2011 season if sugar production does not begin to improve. China refined sugar production in May fell 14% to 184,000 tonnes which pushed January to May production to 7.96 million tonnes, down 18% from last years pace.

TODAY’S GUIDANCE: With better outside market forces and higher energy prices, sugar has seen solid buying support this week as end user buyers are more active. There are longer-term supply issues with this market but short-term pent-up demand looks solid and supply is still relatively tight.

TODAY’S MARKET IDEAS: Aggressive short-term traders can look for a continued bounce. Short-term support comes in at 15.33 for October sugar with 15.88 and 16.40 as near-term resistance. Look for rally to the 16.40-16.58 zone.

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The agricultural markets could be somewhat vulnerable to bearish outside market forces if the turmoil in European debt issue remains a negative force for financial markets. Weakness in world equity markets and the surge higher in the US Dollar could slow world demand, and some agricultural markets seem more vulnerable than others to short-term weakness if speculators were to exit long-held long positions in those commodities. A look at the Commitments of Traders Supplemental Report provides a hint as to which markets could be especially vulnerable to selling pressures if financial market anxiety worsens. Trend-following fund traders or hedge funds (non-commercial, no-CIT Traders) hold large net long positions in live cattle, sugar, cotton and corn. If traders move to the sidelines, these markets could fall under a short-term long liquidation trend.

Sugar already saw a clear and decisive downtrend since March, but trend-following funds still hold a net long position of nearly 64,000 contracts. A resumption of the downtrend could attract increased long liquidation selling. The bears continue to unwrap the sugar market, but it may need more downside in order to lay a firm foundation for any meaningful rally attempts. The latest COT report also showed non-commercial traders (traditionally funds) continued to hold a net long position of 122,593 contracts. While this is a 43% reduction from March 2008 extremes, it continues to reflect a market composition worthy of lower prices in search of value. Rally attempts so far have been feeble and short-lived. October sugar saw a two-cent short covering rally in May that made a push for the March/April lows of 16.00, which appeared sufficient to work off extremely oversold conditions. This left sugar in a rally or bust situation that has so far been a bust for the bulls and has left the market vulnerable to another leg down. So far, there have been two waves down from the January 2010 highs at 22.78 with a good chance for number three. The next area of support comes in at the May spike lows from 14.20 to 13.67. We expect these levels to become violated and are looking for a further downside extension that takes sugar to downside objective of 11.50 prior to expiration.

A lack of support from outside markets and fears of bigger supply ahead could help keep the trend down over the short-term. With the larger supply and good weather outlook, any shift to bearish outside market forces leaves the market vulnerable to increased long liquidation selling from fund traders. The Brazil Cane Industry Association indicated that the center-south sugar production from the start of the season through May 16th reached 4.43 million tonnes, up 38.7% from last year. Ethanol production reached 3.78 billion liters, up 21.1% from a year ago. Many traders look for total sugar production from Brazil for the 2010/11 season to be up 16-20% from last year, as expanded acreage, much improved weather and an early start to the crushing season help boost production. Russia imported a record 1.4 million tonnes of raw sugar in May, but traders see virtually no imports for June or July, as import tariffs jump to $200/tonne this month from $50 last month. Traders see tightness in China for the second half of the year, with talk of a production deficit for the second year in a row. This may help the market forge a low into the summer, but for now the outlook for India to shift from a major importer to an exporter for the coming season and the record crop from Brazil could spark another leg down. The lack of a weather issue so far from key growers India and China along with expectations of a bumper harvest from Brazil could keep the short-term trend in the spot market weak.

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The market still looks vulnerable to increased selling if outside markets turn sour. India ministers will consider re-imposing a tax on white sugar prices next week as sugar millers fear a surge in imports. Sugar industry officials indicate that an import tax of at least 40% on white sugar is needed to support the industry after the recent sharp drop in prices. October sugar gave back all of their early gains yesterday to close slightly lower on the session and near the lows of the day. A turn down in the stock market helped pressure many commodity markets and the lack of much commercial buying support under the market allowed futures to drift lower after the early bounce. Strength in the energy markets failed to provide much support to sugar. The recovery in the stock market and some weakness in the US dollar overnight helped to support. Ideas that the Brazil harvest is progressing rapidly and could result in a major jump in production along with continued talk that India production should bolt higher this year helped to limit the buying on the early bounce. Russia beet area planted is up near 30% this year and industry officials see record production of refined sugar from the beet crop of near 4 million tonnes. This should reduce import demand for the 2010/11 season. The previous record was in 08/09 when the country refined 3.5 million tonnes. Mostly dry weather for harvest in Brazil into the middle of next week should keep a fast pace for sugar production for the season and will help ease some tightness in the pipeline.

TODAY’S GUIDANCE: It will not take much in the way of bearish action in outside markets to spark another round on long liquidation selling from fund traders. Non-commercial traders (funds) held a net long position of 122,593 contracts on the last COT report and this position appears way too high given the steep downtrend in futures prices and the outlook for a significant world production surplus for the coming year. Resistance for October sugar comes in at 14.94 and 15.11 with some support at 14.54 and 14.20.