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The sugar market remains in a steep uptrend, with March sugar posting new contract highs on October 20th. Over the past few months world fundamentals have slowly shifted from a significant world surplus for the 2010/11 season to a possible deficit. A small deficit would normally not be very supportive, but the beginning stocks are historically tight, and the market remains very concerned that the dry pattern Brazil experienced from June through September has left a very uncertain outlook for their production in 2011. While the relatively high price could attract increased production from other areas of the world next year, the market’s upside potential remains explosive if there are continued weather threats to key producers.
After the summer heat wave, sugar production in Germany was expected to come in around 3.65 million tonnes, down from 4.2 million last year. Russian production was also lower due to drought, and Australia’s will reach just 4.1 million versus 4.4 million last year. Traders sometimes count on a strong recovery in Thailand’s production after a year of high prices, but the jump in production this season has been minimal.
Traders look for continued tightness into the first quarter of next year, and there is a growing concern that the outlook for a “steady at best” cane crop for Brazil next year could leave stocks extremely tight. In other words, good weather will not be enough to support any increase in production for next year, and poor weather could cause further tightening. The Brazil cane industry association (Unica) reported that sugar production in Brazil for the season beginning in April through October 1st reached 27.1 million tonnes, up 30.1% from last year. The cane crush was up 17% from last year, while ethanol production reached 20.3 billion liters, up 22% from last year.
China has gradually become a significant importer in recent months, and this may continue. For the 2010/11 season, the USDA attach‚ in China has estimated that production will recover to 12.7 million tonnes, up 10% from last year. However, usage is expected to expand at a 2% annual clip to 15.1 million tonnes. Chinese officials indicate that they will release 210,000 tonnes of sugar from state reserves in an effort to stabilize prices, which have moved to new highs in China. Part of the rally late last week was due to fears that a large, category-5 typhoon was set to hit southern China cane areas. Damage from this storm could widen China’s sugar deficit for this year and boost their import demand.
The Commitments of Traders reports as of October 12th showed non-commercial traders were net long 162,218 contracts, an increase of 8,065 contracts for the week. This buying trend is a positive short-term force, but the hefty net long position held by speculators leaves futures a bit vulnerable to a setback if support is violated. Still, the market remains in a solid uptrend, and the trend has accelerated in the past few weeks. A few technical factors do concern us: 1) Open interest has dropped from 697,692 contracts on September 14th to 587,350 at present. Declining open interest suggests that part of the strong buying trend of the past month has been short-covering, and this may not be considered a good foundation for an extended rally. 2) New highs for sugar on September 14th, September 28th and October 14th have been met with lower RSI readings at each higher high. This divergence suggests a loss of upside momentum. These factors, combined with the volatile action in currency and financial markets, may spark a significant correction over the near term that would represent a buying opportunity.
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