(Agrimoney) – Sugar emerged as an, unexpected, star of agricultural commodity markets on Tuesday, jumping more than 4%, as concerns grew over dryness in parts of Brazil – touching a raw nerve, in coming a year after the start of the drought termed the worst in living memory.
Sugar futures had been a reluctant contributor to Monday’s rally in ags, posting small gains.
Yesterday, “sugar futures only attended the agri commodity party grudgingly, arriving late and leaving early complaining of a headache,” as Tobin Gorey at Commonwealth Bank of Australia put it.
But the sweetener grabbed the limelight on Tuesday, closing up 4.2% at 14.87 cents a pound in New York for March delivery, its best performance in three months, and one which saw the contract close above its 20-day moving average for the first time since late November.
London white sugar for March rose 3.2% to $392.90 a tonne, also reclaiming its 10-day and 20-day moving averages.
‘Drier than normal’
The rises – which defied a tumble in ethanol futures, in theory a major influence on sugar values – were attributed largely to concerns over dry weather in parts of central and eastern Brazil.
“It will be drier than normal,” Jack Scoville at Price Futures said, if adding that the weather will “not be completely dry.
“However, the lack of normal-to-above-normal rains in sugar areas fits the patter seen over the last month or more, and sugar production potential could be suffering.”
While it has to be said there is some scepticism over the threat yet posed by the weather, the impact on sugar futures was enhanced by the memory of a year ago, when Brazil was in the early stages of a drought which depressed cane output in the Centre South region, although having a bigger impact further east in the coffee belt.
Furthermore, there was talk of automatic buy orders being triggered when prices crossed above 14.50 cents a pound, and of hedge funds queuing to get ahead in closing short bets, after US regulatory data revealed a huge net short position in the sweetener.
An extreme fund short can raise alarm among investors of price rises, given that such positions require purchases to close, and realise profits.
‘Pockets of stressed vegetation’
The Brazil weather concerns provoked further buying in arabica coffee too, which soared 4.0% to 174.90 cents a pound in New York for March delivery, also closing above the contract’s 20-day moving average for the first time since November.
The contract is now up 8.6% in two sessions – despite assessments that index funds are about to cut their exposure dramatically amid the rebalancing process.
Mr Scoville flagged “expectations for drier than normal conditions in coffee areas of Brazil for the next couple of weeks,” if highlighting again that “it will not be completely dry”, and adding that there is “no real heat” in the forecast to beef up tree stress.
Still, Gail Martell at Martell Crop Projections noted nonetheless that satellite imagery had revealed “pockets of stressed vegetation” in parts of Minas Gerais, Brazil’s top coffee producing state, besides further west in areas of Mato Grosso, the main soybean grower.
As an extra boost to coffee, and sugar, Brazil’s real nudged higher against the dollar, boosting the value in dollar terms of assets over which the South American country has a big influence.
London robusta beans rose a more modest 2.0% to $1,952 a tonne for March, curtailed a little by talk of an uptick in exports from Vietnam, the top grower of the variety, thanks to greater producer selling.
‘Worst case scenario’
The Brazil weather fears spread to soybeans too, with the country the second-ranked grower, and exporter, of the oilseed, behind the US.
“The developing story around the soybean market centres on a drier-than-usual weather pattern being experienced in central and northern Brazil,” Benson Quinn Commodities said, flagging expectations of “high pressure that is expected to limit rainfall in these select areas through mid-January.
“To this point, the effects of recent dryness has been partially offset by adequate subsoil moisture in many of these areas.”
Still, traders are pencilling in a “worst case scenario of 2m-3m tonnes of soybean production lost due to this period of abnormal weather for this region”.
Informa revisions
That would still leave Brazil likely looking at a record harvest this year.
And there are doubts anyway over the threat posed by the dry weather, with Richard Feltes at RJ O’Brien terming the concerns “overrated” and flagging local intelligence that “only 5% of Brazil soybean area is on the dry side, although this could expand if not rains for the next two weeks”.
Still, soybeans got extra help from a cut of 22m bushels, to 3.969bn bushels, in Informa’s estimate for the US harvest last year, a cut reflecting a reduction of 0.3 bushels per acre to 47.6 bushels per acre in the yield figure.
(The estimates are still a touch ahead of the US Department of Agriculture’s, at 3.958bn bushels and 47.5 bushels per acre.)
Furthermore, on the demand side, the USDA announced further sales of US soybeans to Chinese importers – 123,000 tonnes for this season, and 120,000 tonnes for next.
Soybeans for March added 1.0% to $10.55 ¾ a bushel, ending near its highest point of the day, and securing its position back over a clutch of moving averages.
Safrinha sowings
Fellow row crop corn, however, could not keep up the pace, facing more challenging fundamentals.
While Informa trimmed its estimate for US corn production by 68m bushels to 14.425bn bushels, that remained above the USDA figure of 14.407bn bushels.
Furthermore, it was more than offset, by an upgrade of 3.0m tonnes to 72.25m tonnes in the estimate for output from Brazil, for which the revival in futures in late 2014 has made sowings of second crop, planted in the first couple of months of the calendar year, more appealing.
Ukraine’s harvest was upgraded too, by 1.5m tonnes to 28.0m tonnes.
Ethanol plunge
And, as further evidence of the appeal of current prices to South American farmers, there are ideas of a step-up in selling by the region’s farmers.
CHS Hedging, flagging a rise of 16,000 contracts on Monday in corn futures, flagged that “the biggest increase was seen in the May contract, up 4,900.
“This appears to confirm that the South American producer was selling into yesterday’s rally, because they hedge in the May contract as their new crop contract,” akin to the December lot as the benchmark for US growers.
With lower oil prices feeding through into a collapse in ethanol prices, which for February futures slumped 6.2% to $1.493 a gallon in Chicago, corn for March eased 0.3% to $4.05 a bushel.
“The weakness in the energy sector has continued to cap corn rallies and over –the-counter January and February ethanol futures are now below $1.50 per gallon,” Darrell Holaday at Country Futures said.
‘Disappointingly low ratings’
Corn’s reluctance helped put the brakes on the rally in wheat, which for March ended up 0.5% at $5.91 ¾ a bushel in Chicago, nearly 12 cents below its day high, touched amid concerns of winterkill from the US cold snap, and poor condition ratings in USDA data overnight.
“Crop ratings for the wheat crop were disappointingly low compared to ratings from November,” Benson Quinn Commodities said.
Furthermore, there is some scepticism over exactly how much of a threat the cold weather will prove.
“At this point, it remains too early to put any solid quantification around the impacts it might have on production,” said Jack Watts at the UK’s HGCA bureau.
“So the upshot is, don’t be surprised if current ‘fears’ are not realised come summer.”
Spring wheat outperforms
In fact, Minneapolis spring wheat fared slightly better than its Chicago peer, adding 0.9% to $6.27 a bushel for March delivery, amid continued talk of Chinese importers on the prowl.
“Expectations are for China to increase high quality wheat [imports] to meet domestic demand, because China did not produce enough high quality wheat to meet their demand this year,” CHS Hedging said.
While China’s wheat production rose in 2014, “the larger crop was noticeably lower in protein.
“Therefore, traders are seeing China seeking higher protein than last year.”
Hard vs soft
Kansas City hard red winter wheat, having both higher protein and winterkill aspects to call on, rose 1.2% to $5.24 ¾ a bushel.
By contrast, Paris soft wheat for May closed unchanged at E202.75 a tonne, despite some decent European Union export data, with licences for 965,000 tonnes granted for shipments in the last two weeks of December.
That took the total for 2014-15 to 14.6m tonnes at the half way point, time-wise, ahead of the 14.4m tonnes at the same point of last season, which ended with record exports.
