A closer look at the Brazilian cane harvest : Macquarie

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A closer look at the Brazilian cane
harvest
Feature article
 Sugar prices have been defying the bearish tone afflicting the softs complex
since May to rally up 10c/lb to 3-month highs of 29c/lb. Ignoring the risk of
macro fears or indeed the looming global sugar surplus expected for 2011/12,
prices have been supported by Brazil’s lower than expected cane crop. We
take a more detailed look at just how poor Brazil’s crop will likely be, and if the
recent rally is justified.
Latest market update
 Sugar continued to ascend on the back of speculator buying and short
covering. At a time of general withdrawal of risk-averse speculators from
commodities, sugar futures saw the managed money net long position rise
over 60% from mid May to late June. We continue to think that prices will
ease off, in view of our 8mt global sugar surplus projected for 2011/12 (this,
despite our downward revision of Brazil’s supply highlighted in this report).
After the July expiry, we would expect the build-up in net length to be
vulnerable to a sell-off – particularly as we move closer to the Northern
hemisphere harvest times. While pockets of bullish news still pop up (eg,
China still has pent-up import buying, while the US has raised its import quota
to 1.68m short tons for Oct/Sep, and could increase it again in the new
season due to delayed US beet plantings and very dry conditions in Mexico),
we see more bearish risks ahead. Ramadan related buying is over, early
indications for the FSU beet crops are very good, and ahead of a looming
domestic surplus, India has allowed 500,000t of additional OGL exports, with
more under discussion.
 Coffee futures rallied this week to 265c/lb on news of frost emerging in parts
of Parana, Brazil. We do not think any damage will occur, but at a time when
most speculators are net short the NY market, any supply-side risk at a time
of still-tight inventories could trigger a sharp reversal in prices which had fallen
steadily lower to 240c/lb last week from the May peaks. Extreme tightness for
Asian origin Robustas continue to support high physical premiums over
London futures. According to the USDA, Vietnam will grow a record 20.6m
bags in 2011/12, up 1.9m bags from 2010/11, but Indonesia is forecast to
produce 7.9m bags, down 1.4m bags from the previous crop.
 Cotton futures suffered alongside grains and other commodities with macro
risk aversion. However, week US export sales data and the USDA’s bearish
acreage report released today pushed Dec 11 cotton even lower to $1.17c/lb.
All cotton planted area for 2011 is now estimated at 13.7m acres, compared
to the March estimate of 12.57m, and some 25% above last year. However,
considering that the increase in planted acreage falls predominately in Texas,
a state that remains victim of a severe drought, we suspect that hardly any of
this “added” acreage will materialise into additional production. With more
than a quarter of the US cotton crop in bad condition, we are expecting a high
rate of abandonment, with many Texans having already torn out their plants
this month in order to collect insurance money.