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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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