The Hightower Report

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The dry forecast for Brazil sugarcane areas, weakness in energy and other commodity markets overnight and a strong bounce in the US dollar are all factors which could slow the recovery bounce in sugar over the near-term. Ideas that imports from Pakistan, Mexico, the US and Russia could be enough to spark another jump in cash prices over the near-term has helped to support the recent bounce. Monsoon rains in June in India, Pakistan and Southeast Asia will be critical this year as the market has seen a drawdown of nearly 20 million tonnes of sugar in the past two years and a surplus will be needed to replenish stocks. July sugar pushed sharply higher on the session yesterday closing higher for the 4th session in a row and moving to the highest level since March 31st. Talk of improving demand over the near-term along with tight near-term supply of available sugar for export were supportive. A surge higher in the May London white futures contract during the past week and sharply higher trade in energy markets and the stock market helped to support the sugar market as well. China production in March was just 2.02 million tonnes, down 24% from last year and this pushed first quarter production to 7.39 million tonnes, down 15% from last year’s pace. China is working on a second year in a row of a significant production deficit and the slow pace of production may be a concern. Traders will be monitoring the pace of selling and production from Brazil and there was talk of Brazil producer selling in futures yesterday. The weather looks near ideal for a fast start to Brazil production for April. Open interest was down 3,872 contracts which was not a good sign given the recent strong move higher.

TODAY’S GUIDANCE: The market has corrected the oversold condition and outside market forces could weigh on futures to start the session. The break from the highs was so severe that even a move to 19.10 will not turn the trend back up. Tightness in the pipeline is likely to be a supportive force for another month or so.

TODAY’S MARKET IDEAS: The market looks to see a short-term set-back but the recovery bounce off of the lows may not be over. Watch for some short-term selling pressures but cash buyers are likely to support the market on breaks. July sugar support comes in near 16.94 and 16.65 with 18.67 and 19.10 as next upside targets. The June 19.00 calls look rich near 45 points.

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The market seems to be seeing some correction of the oversold condition with the consolidation period since March 23rd but it is still not clear if the long liquidation trend is complete. London futures were closed yesterday but start today on a firm note despite weakness in outside markets. The technical action from New York late last week looked supportive but there was a lack of follow-through interest yesterday. Traders see the outlook for a much larger Brazil crop for the coming year along with indications that India production for the season ending this fall will come in closer to 18.5 million tonnes than 16 previously believed continues to weigh on the market. The COT reports on the weekend showed a fairly aggressive buying trend from funds and specs which is normally seen as a supportive force but given the steep downtrend, the fact that specs still hold a hefty net long position has traders nervous that the trend will remain down until the spec net long position is reduced. The combined (non-commercial and non-reportable) net long position increased 4,281 contracts for the week to a still high 158,744 contracts. The market saw some follow-through buying and a bounce early in the session yesterday after Thursday’s key reversal pattern but the buyers could not hold futures higher and the market closed 15 lower for July and well off of the early highs. Outside markets were supportive with higher equity, energy and metal markets and a weaker tone to the dollar. The biggest volume day since February 22nd on Thursday helped to confirm the reversal bottom but at this point the July futures will need a move over 17.21 to attract new buyers.

TODAY’S GUIDANCE: While technical indicators and the chart formation suggests a near-term low is in place, the Commitments-of-Traders reports still show a hefty net long position from speculators which opens the door for more long liquidation pressure if support levels are violated.

TODAY’S MARKET IDEAS: Look for support for July sugar near 16.37 to 16.16. Resistance comes in at 16.90 and 17.20 and another leg down counts to 14.74.

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May sugar will need to move back over 17.81 to expect any new buying interest and for a confirmation of a near-term low. It will take a close over 18.64 to see a weekly closing price reversal to confirm the daily reversal on Wednesday. Traders will be monitoring the Commitments-of-Traders reports after the close as recent reports have shown a reluctance by speculators to move out of large net long positions. However, that may mean that these traders have started to sell this past week. May sugar could not find follow-through buying yesterday after Wednesday’s surge up from 10-month lows. After some choppy to lower trade early, the market deteriorated late in the session. A stable Dollar added to the reluctance of physical buyers to step into the market, even with prices losing nearly half of their value over the past two months. An estimate that this season’s production in India will be 17 million tons, about 1-2 million higher than estimates a few months ago helped to spark some selling but this news was also out as the market fell to the lows into the middle of the week. Traders are hopeful that India can produce near 24-25 million tonnes for the 2010/11 season as compared with usage which is thought to be near 23-24 million. This, combined with ideas of heavy incoming supply during the next few months from Brazil who could boost production by 3-4 million tonnes above last year helped to support. Tunisia bought 18,000 tonnes of white sugar for June arrival. Pakistan postponed a new tender to buy 200,000 tonnes of white sugar from March 27th to April 17th. Pakistan bought 200,000 tonnes on Monday. The US Agriculture Undersecretary yesterday indicated that there has been no decision yet on increasing US sugar import quota. April 1st is the first day in which the department can adjust the import quota for the season and many traders believe the US needs to import an additional 1 million tonnes to alleviate tight supply.

TODAY’S GUIDANCE: China could emerge as a more significant importer for the coming year if their drought situation does not go away and Russia, US, Mexico and others could be close behind. The daily reversal on Wednesday is a clear sign of a near-term low but the market will need to experience follow-through buying to confirm a low.

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The market remains in a steep downtrend and with bearish technical action yesterday and new lows overnight, the long liquidation selling trend continues. Keep in mind; the combined non-commercial and non-reportable (spec) net long position as of March 9th was still 156,406 contracts so new lows will still attract new long liquidation selling. May sugar closed sharply lower yesterday as the market continued its long liquidation trend from last week as well as exiting its recent consolidation range. Prices have now reached their lowest levels since last July, as expectations of a massive Brazil cane crop along with the easing of the world’s sugar deficit have kept longs under pressure. With a weak dollar, strong gold prices and another bounce in energy prices, the outside market forces are positive but the spec liquidation trend appears to be the dominate force today. An announcement during the session that Pepsi plans to stop sales of full-sugar beverages to schools only added to the market’s negative tone and there are revived efforts by states and even cities to tax sugar beverages. Physical buyers have been reluctant to make purchases recently, in anticipation of even lower prices during the near future. London nearby white futures fell 3.7% yesterday. Australia sugar production for the coming season is expected to be up 7-8% from last year with much better weather expected to push cane production higher.

TODAY’S GUIDANCE: While there appears to be plenty of potential buyers, the new buyers are still waiting to see some stability or a sign of a low before extending coverage. Speculative liquidation remains the dominate force. Support for May sugar is at 19.38 and then 18.43. A move through 20.19 may be enough to spark some short-covering and start a recovery bounce with 22.04 as initial objective and we would not rule out a strong recovery to 22.70.

TODAY’S MARKET IDEAS: The next support for May sugar comes in at the 17.45-17.10 zone with 19.65 as trendline resistance. It will take a move back through resistance to expect a low.

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Realization that India demand will remain slow and that extra sugar from India backing out of import deals (estimated at near 100,000 tonnes so far) has sparked a very bearish tone to the sugar spot market. Traders are fearful that washouts could increase to near 600,000 tonnes quickly if sugar prices don’t bounce as India buyers pay a stiff penalty and back out of deals. An official with the India Mills Association indicated that sugar supplies in India are comfortable and that the country does not require further imports. Spot prices in India have slipped to the lowest level since October. May sugar pushed sharply lower on the session yesterday and moved to the lowest level since early August. A strong US dollar, weakness in the energy complex and a higher production estimate from India are all factors which helped spark another round of long liquidation selling and the move under last week’s lows attracted additional selling pressure. Pakistan announced a tender to buy 200,000 tonnes of white sugar but this failed to provide much support and the speculator long liquidation selling helped drive the market lower. This selling continued in the overnight hours and May sugar is down as much as 358 points off of Monday’s highs and more than 1000 points (10 cents) off of the February 1st reversal top.
The COT reports on the weekend showed that speculators were still in a long liquidation mode and that speculators still held a massive net long position. Non-commercial traders (funds) still held a net long position of 153,218 contracts as of March 2nd. Russia imports in January came in at 82,600 tonnes from 12,700 tonnes last year as the import tariff is down and could slip further in the months just ahead.

TODAY’S GUIDANCE: Buyers could emerge on the break but for now, minor bearish news is snowballing to major long liquidation selling. A 50% retracement of the entire bull market of 2007 to 2010 comes in at 19.38 and this may now act as short-term resistance with 18.43 as next target.

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The market continues to see a massive long liquidation sell-off and pushed to the lowest level since November for the October futures overnight. Open Interest peaked at 897,343 on February 4th and was 756,950 contracts yesterday. The market faces continued extreme tightness in the cash market for the next month or so but traders await a new harvest from Brazil soon. Traders believe the taker of the large deliveries may not have a home for the sugar which just added to the aggressive selling yesterday as a lack of interested new buyers in the cash market recently has been an added negative force. The real key to avoiding another world production deficit for the coming year will be weather for India and China as both regions have seen sub-par crops in the last two years and India saw an especially poor crop last year due to poor monsoons in June and July. The China sugar Association believes this years crop will be near 11 million tonnes from 12.43 million last year. This could leave a significant production deficit. May sugar collapsed to close sharply lower on the session yesterday and moved to the lowest level since early December with fund traders noted as aggressive sellers. Keep in mind; the combined spec net long position (small and large specs combined) as of February 23rd was still 186,603 contracts. This was down 22,219 contracts for the week but this is still a very large net long position. Traders indicate that the slow pace of demand in the past few weeks in the cash market and big deliveries against the March contract helped to pressure. The move under last weeks lows added to the bearish tone and sparked more selling. Deliveries came in at 11,951 contracts as compared with expectations for 5,000-10,000. Exports from Brazil for the month of February reached 979,900 tonnes, down from 1.289 million in January and up slightly from 940,700 tonnes in February of 2009. Ethanol exports were just 21,400 liters from 152,900 liters in January and down from 118,500 liters in February of 2009.

TODAY’S GUIDANCE: The market is still looking for a low enough price to find increased interest is sugar and speculative long liquidation selling could remain active.

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The technical set-up remains bearish as high open interest, a very large net long position from fund traders and a long liquidation mode from trend-following funds helps drive prices lower. With the trend turning lower and trend-following funds net long 118,228 contracts, the selling intensified yesterday as last week’s lows were taken out. Ideas that the Brazil crop is coming along well and that the new crop supply will begin to ease the tightness on the world market helped to pressure. Traders see new crop hitting the market by late March and early April or sooner if the region turns dry. In addition, traders see the recent high prices as a reason to suspect declining global demand. May sugar closed sharply lower on the session with May futures driving down to the lowest level since December 22nd. The sharp drop in the open interest combined with a hefty net long position of funds has traders nervous over the potential for more long liquidation selling ahead. Last week’s indications of strong demand from India failed to support a resumption of the uptrend and the outside day down yesterday helped to spark more selling; especially when the market penetrated last week’s lows. The selling and the break stopped right on the 100-day moving average at 24.03 basis May futures. The market last closed under the 100-day moving average on December 9th. May sugar is now down as much as 18.1% off of the February 1st high. The key reversal on February 1st was confirmed as a top with a weekly key reversal for the week ending February 5th. A government panel on Friday indicated that India needs to urgently import 3-5 million tonnes. Lower than expected production from Mexico and increased demand from the US had traders looking for Mexico to import some sugar and export to the US. The International Sugar Organization revised their world production deficit forecast for the 2009/10 season to 9.4 million tonnes from 7.2 million previous. The deficit last year was 11.7 million tonnes.

TODAY’S GUIDANCE: The liquidation threat looks significant and the short-term trend looks down. Resistance for May sugar comes in at 24.40 and 25.03 with 23.07 as next objective.

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After the sharp break of more than 15% last week, sugar has consolidated in a choppy range this week. The weaker tone coming from outside markets and fears of the overbought condition of the market helped spark the sell-off and traders are now trying to determine if a major top is in place. This is difficult to say as cash trader psychology and spec trader confidence are important forces. From a fundamental point of view, the market remains in an extremely tight stocks situation and the tightness looks to persist until at least April and much of the early harvested cane crop from Brazil is likely spoken for so there could be another leg higher in prices into late February or March. May sugar closed moderately lower on the session yesterday but well off of the early lows. Selling pressures eased on the day after the US dollar fell back from the early highs and energy markets and the stock market firmed. Ideas that the tightness issues for the market will be resolved when Brazil harvest gets going in the spring and a lack of new news for the cash market helped to support. Brazil harvest in the center-south region is winding down as rains make it slow to get much complete during the rainy season but mills have stayed open much longer than normal as high prices for sugar and ethanol are attractive. For the April09 to March10 season, Brazil mills in the center-south region have crushed 529.6 million tonnes, up 5.7% from the previous season. The region has produced 23 billion liters of ethanol, down 7.4%. Pakistan has dropped a tender to buy 150,000 tonnes of white sugar due to problems with the terms of the lowest bidder. India mills are shutting down earlier than normal this season in the two largest producing states due to lower cane supply. The Brazil government is coming out with a series of measures to boost fertilizer production as the country imports near 65% of their needs. For the 2009/10 season, Mexico has produced 1.609 million tonnes of sugar, down 9.97% from last year.

TODAY’S GUIDANCE: May sugar support comes in at 25.72 with 26.94 and 27.42 as resistance. A resumption of the uptrend will leave 30.55 as a longer-term objective.

TODAY’S MARKET IDEAS: Given the strong cash market fundamentals, the market seems to be in a position to at least challenge better resistance points in the 26.94-27.42 zone soon.

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The market inched higher in overnight trade pushing to a new 29-year high before pulling back to trade lower late in the overnight session. The market appears to be well supported by speculators on minor set-backs. Talk of disease issues in Brazil and a tighter than expected market in China helped to provide underlying support. A local government official in China’s largest producing region (Guangxi) suggested that production could slip about 700,000 tonnes from last year due to drought-type conditions since August. Traders expected a drop of near 350,000 tonnes from the region so the talk was seen as positive. China has already released near 860,000 tonnes of sugar from state reserves as a way to ease prices but traders suspect a production deficit of near 2 million tonnes or more from China this season. March sugar closed 90 higher on the session Friday and closed up 112 points for the week last week. The market pushed to a new 29 year high at 3033 before pulling back to close back under 30.00. Extreme tightness in the cash market and indications that cash buyers are a bit more active helped support the aggressive buying. Ideas that the market is overbought helped spark the sell-off early in the week but buyers were active Friday despite bearish outside market forces, a strong US dollar and another break in energy prices. The Commitments-of Traders reports for the week ending January 26th showed a light selling trend from speculators who reduced their net long position by 5,619 contracts to 230,453. Index funds reduced their net long position by 4,257 contracts to a net long of 139,538 while non-reportable traders (small specs) reduced their net long position by 5,562 contracts to 41,132. The selling trend is a short-term negative force and the hefty net long position of the speculator leaves the market in an overbought status but still not at an extreme. Traders remain concerned with the possibility of tightening credit in China and a slowdown in the recovery. Traders are lightly concerned with potential losses in Brazil sugar production due to the spread of orange rust fungus. The fungus spread to two more regions in Brazil. Traders do not see major losses from the fungus and 70% of the cane is already resistant to the disease. With about 15% of the cane crop re-planted each year, resistance varieties will soon be fully used.

TODAY’S GUIDANCE: Weakness in London and a threat of a reversal today if the market closes lower may keep new buyers away. However, commercial buyers are likely to be active on corrections.

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The market looks to remain in a volatile state as “uncertainty” over the impact of the proposed new banking regulations was enough to spark a long liquidation trend overnight. While futures saw a recovery into the close yesterday from a severe mid-session break, the selling from liquidation emerged again overnight. Limiting the speculative activities of banks could have some impact in the long run on market prices but the initial reaction is clearly negative. Keep in mind; index funds held a net long position of 166,564 contracts as of January 12th and hedge funds (trend-following funds) were net long more than 125,000 contracts. While there is only a very remote chance that any of these funds will be forced to liquidate or will be closed without bank sponsorship, the uncertainty may be enough to spark some short-term selling. March sugar closed slightly higher on the session yesterday after a wild and volatile day. With a range of 114 points, March sugar closed just 15 higher on the day after making new 29 year highs early in the session for the third day in a row. The market was supported by a surge to new all-time highs in the London futures and the volatile session came about with a clash of short-term bearish outside forces such as a sharp decline in energy markets and the stock market with the presence of significant buying interest for new cash business. Talk of Russian imports ahead and tight India stocks helped support. Growers from Mexico indicate that the country will need to import near 450,000 tonnes this year to rebuild inventories and to meet export commitments. The Agriculture Minister indicated that the crop will slide to the 4.5-4.9 million tonne level as compared with production of 4.96 million tonnes last year. Last year’s production was low and forced Mexico to import 550,000 tonnes. There is also talk of a fungus disease in Brazil which has been floating around for a week or so but without confirmation.

TODAY’S GUIDANCE: There is increased risk to a long liquidation sell-off with yesterday’s news. Support for March sugar comes in at 28.63 and 28.27 with 31.02 as next upside objective.