The Hightower Report

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While the fundamental setup for the first quarter looks supportive, the hefty net long position held by speculators and weakness in outside market forces appear to be enough to see a more serious downside correction. As of December 28th, the COT report showed that together, non-commercial and nonreportable traders held a net long position of 202,468 contracts. The market closed sharply lower on the session yesterday with a 310 point range, keeping volatility as a front-burner issue into early this year. While the range appeared wide, trade stayed inside of the 485 point range from December 30th. The Brazil center-south cane harvest season appears to be mostly complete, according to officials there. They expect the cane harvest for the 2010/11 season to end up less than 560 million tonnes. This is down from their August forecast of 570.2 million, and that was down from their estimates when the season started. The region had crushed 552.5 million tonnes by December 16th, which was up 7.2% from last year. Sugar production reached 33.4 million tonnes, up 19.5% from last year. Weakness in the energy and metal markets plus a turn higher in the US dollar may have helped spark the selling. India is beginning to export sugar on the world market, but these supplies are badly needed, as Australian exports are expected to drop 25% from earlier expectations due to flooding. The recent floods are occurring after the harvest, so they should not have too much of an impact on the current crop, but it may not be good for next year’s harvest. For the key China sugar producing region (which represents nearly 70% of total), production for the first three months of the 2010/11 season has reached just 2 million tonnes, down 11.4% from last year’s pace.

TODAY’S GUIDANCE: While the fundamentals look supportive, the technical action is weak and the market remains in an overbought condition. Close-in support for March sugar comes in at 30.03 and 28.92 with 32.13 and 32.76 as resistance.

TODAY’S MARKET IDEAS: With a bearish set-up for outside markets today, new buyers may want to wait to see how far the liquidation selling takes the market down.

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Once the supply flow from Brazil begins to slow due to a seasonal decline in production with the onset of the rainy season, the market will be faced with a tightening supply into the spring. Thailand sugar is trading at a premium to the London white futures contract, which closed at $820.40 per tonne. However, India sugar is offered around $750, so it will be important that India becomes a more reliable source of white sugar on the world market over the near term. While the processed market adjusts, the raw sugar export market also looks to tighten just ahead, and this could be the foundation for another leg higher in sugar in the first quarter of 2011. China looks to be a much more active importer in the months ahead, as the country has a significant production deficit of nearly 2 million tonnes and traders see the reserve stocks as too low. China could buy an additional 2 million tonnes just to restock reserves. The Commitments of Traders reports as of December 21st showed non-commercial traders were net long 161,804 contracts, an increase of 17,311 contracts for the week. The aggressive buying trend of the fund trader is seen as a positive short term force. Non-commercial and nonreportable traders combined held a net long position of 200,385 contracts, up 25,156 for the week. Commodity index traders held a net long position of 141,094 contracts, up 2,835 contracts for the week. March sugar closed moderately lower on the session yesterday but near the middle of the range. The early trade came up short of psychological resistance at 34 cents, and long liquidation selling emerged to drive the market as low as 33.23 before a bounce of about 40 points off of the lows into the close. A lack of new supply/demand news and some long liquidation selling following the move to new 30-year highs on Thursday may have helped to pressure the market. While not seeing a new contract high, March OJ managed to see a new contract high close yesterday, with another frost and freeze damage warning overnight in Florida’s citrus growing areas. In addition, the flooding in California managed to disrupt the peak of the harvest there, as workers could not proceed. Some fruit will be lost to the harsh weather.

TODAY’S GUIDANCE: The outlook for China to be a much more aggressive importer of sugar for 2011 continues to provide underlying support, and the sharp break in the US dollar overnight might encourage investors to continue to dive into the agricultural markets as a hedge against inflation. The market seems to have the basic supply/demand fundamentals to see another leg higher.

TODAY’S MARKET IDEAS: Buying support for March sugar comes in at 33.40 and 32.67 with 36.48 as the next upside objective.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The market could garner more technical support on a move above 29.75 and especially above 30.30 basis the March futures. It should not take much in the way of demand news or of wet weather to slow the harvest in Brazil to see an extension of the current uptrend for sugar. The sugar market managed to recovery from earlier losses on Friday to close higher on the day. March sugar managed to hold above the lows from Wednesday into the mid-session and buying emerged to support the strong close to near the highs of the day. Too much rain in Brazil may have helped to slow harvest and the market managed to muster up support from continued talk of tightening supply ahead. Weakness in gold and energy markets helped to pressure the market early. Outside markets look strong to start this week and the jump in energy prices could help support the sugar market as well. Ideas that the Brazil crop next year will be “steady at best” vs. the 2010 production just adds to the bullish outlook as the market has gotten used to a steady rise in Brazil cane production for much of the past decade. China is working on its third year in a row of a significant production deficit and state reserves are thought to be tight. This would imply that China will need to offset the deficit with imports and would also need to import extra sugar to build reserves. The Commitments of Traders reports as of December 7th showed Non-Commercial traders were net long 140,743 contracts, a decrease of 116 contracts. Non-Commercial and Nonreportable combined traders held a net long position of 167,482 contracts. This was up 4,711 contracts for the week. Commodity Index traders held a net long position of 137,604 contracts. This represents a decrease of 3,519 contracts for the week.

TODAY’S GUIDANCE: The COT report is a mixed bag as the spec net long position is still relatively high. It will be important for the bulls to see the market avoid a long liquidation trend into the end of the year.

TODAY’S MARKET IDEAS: Buying support for March sugar comes in at 28.40 with 30.30 and 30.77 as next good resistance.

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Many trade houses are already adjusting their world supply/demand forecast for the 2010/11 season to show a world production deficit for the third year in a row. This would suggest that world ending stocks will tighten further into the spring of 2011. The sugar market pushed higher on the session yesterday and moved to the highest level since November 19th despite a sharp rally in the US dollar and weakness in equity markets. The dollar is up again overnight but so is sugar. Traders saw the rally yesterday as impressive on a day when the US dollar pushed sharply higher and to the highest level since September 21st. Solid gains for sugar in London and positive trade in energy markets helped to support. Brazil center-south cane crush for the first half of November was down 16.7% from last year’s pace. Total production for the season so far has reached 32 million tonnes, up 22% from last year. Traders are still thinking that the dry weather for the April to September time frame helped to boost production this year but that Brazil production next year could be up or down a few percentage points depending on the weather. A senior government official in India indicated that export surpluses will emerge as long as India production for the new season which began on October 1st tops 24.5 million tonnes. The head of the India sugar mills association believes that production will reach 25.5 million tonnes. While many traders see this as easily achievable, there is some concern that this will not be verifiable until later in the season and traders are hoping to see 2-3 million tonnes of exports in the tighter supply period of December through February when Brazil exports slow. The USDA attache in Russia indicated that despite the record plantings last year, sugar production was down 14% from the previous year due to poor weather. Lower import duties could support better import demand ahead and the attache sees imports of raw sugar at 2.85 million tonnes this season from 2.1 million last year. The Commitments of Traders reports as of November 23rd showed Non-Commercial traders were still holding a net long of 137,672 contracts, a decrease of 3,689 contracts for the week. The selling trend is seen as a short-term negative force. Non-Commercial and Nonreportable combined traders held a net long position of 162,503 contracts, down 4,244 for the week. Commodity Index traders held a net long position of 147,503 contracts, down 1,291 for the week.

TODAY’S GUIDANCE: The market seems to have the supply side news to turn higher off of the recent consolidation pattern. Key support is developing near 26.20 for March sugar and a close over 28.39 could be enough to turn the minor trend back up.

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The market may have put in a short-term low with the price action yesterday and a more positive turn for commodity markets in general overnight led by a weaker US dollar may be enough to see a resumption of the uptrend. The longer-term supply/demand fundamentals into the first quarter look positive for sugar but the market has had just a few days to consolidate recent losses so we cannot rule out a period of more consolidation before the market makes another run at the highs. In fact, with a hefty net long position of speculators, the market is still vulnerable to increased selling pressures if support is violated. On the other hand, open interest is down and Brazil production should gradually decline in the weeks ahead. Cane crushing since the start of the season in April through November 1st reached 500.9 million tonnes, up 12.6% from last year. Brazil sugar production for the period reached 30.5 million tonnes, up 24% from last year. China will release 200,000 tonnes of white sugar from reserves on Monday which will be the second auction since October. The government sold 216,803 tonnes of white sugar on October 22nd. China is trying to fight inflation but the country also faces a significant production deficit. The International Sugar Organization lowered their prediction of a world production surplus for the 2010/11 season to just 1.29 million tonnes from 3.22 million in August. March sugar closed slightly higher on the session yesterday after a 193 point range. Less concerns for actions taken by China to fight inflation and a slowdown in the fund selling seen in recent days helped provide some short-covering and support to the market. Ideas that Brazil production will begin to decline seasonally and help tighten the cash situation added to the positive tone. While the US dollar was down slightly, energy market weakness and mixed trade for financial markets helped to limit the buying. These factors have all turned more positive overnight. Before the recovery bounce, March sugar moved to the lowest level since October 8th.

TODAY’S GUIDANCE: We were hoping to see a more extensive downside correction to be buyers but the outside market forces have turned more positive. Close-in support for March sugar moves up to 26.69 to 26.02 with 28.39 and 29.34 as resistance.

TODAY’S MARKET IDEAS: Consider buying minor set-backs looking for a resumption of the uptrend.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

A slightly positive tilt to commodity markets with the US dollar inching lower helped support the sugar market overnight, and higher prices for London white futures added to the positive tone. The market faces a tightening supply situation into the first quarter and uncertainty over the size of the Brazilian crop for the second quarter, and both of these issues are supportive to the market. March sugar closed sharply higher on the session yesterday and pushed through to a new 30-year high for the highest close in the spot contract since January 1981. Concerns that Brazil’s production season will slow or stop into the first quarter as the crush season slows and uncertainty over just how much if any of the sugar surplus from India will be available on the world market lent support. An Indian food ministry official on Friday indicated that they would allow the export of more than 1 million tonnes for the December to March time frame, but traders await official confirmation. Many traders hope to see as much as 2.5 to 3.5 million tonnes exported from India this season. Extremely tight world beginning stocks and an uncertain outlook for 2011 have helped drive prices higher. The weaker US dollar and strength in other commodity markets also helped to support sugar yesterday. The China Sugar Association pegged production for the 2010/11 season at 11.74 million tonnes, up 9.3% from last year. However, a recent update from the USDA attache in China forecasts consumption to be near 15.1 million tonnes.

TODAY’S GUIDANCE: The market seems to have the fundamental and technical setup to see a continuation of the uptrend. Outside market forces are still mostly positive, and the results of the FOMC meeting for this afternoon could have a significant impact on the US dollar. Breaks look like buying opportunities.

TODAY’S MARKET IDEAS: Short term support for March sugar comes in at 29.80 and 29.58 with 30.95 and 32.87 as next upside targets.

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Traders remain nervous over any new production difficulties for the 2010/11 season as production declines so far have reduced world production surplus estimates to zero and the market started the season with historically tight stocks. March sugar closed sharply higher on the session yesterday and into a new contract high. A weaker US dollar and a recovery in other commodity markets overnight helped boost the market to yet another new high to start the session today. The market shook-off very bearish outside market forces yesterday with a surge higher in the US dollar and sharp losses in energy and equity markets contributing to heavy losses in many other commodity markets. However, trade focus on the longer-term production outlook for Brazil, the potential for lower planted area next year in the US and the potential for crop losses in China from typhoon damage helped to support. Trade house buyers were active and traders see tightening supply into early 2011 as a supportive force. Too much rain in Australia for the cane harvest may cause sugar content to slip and officials see the possibility of a downward revision in production for the 2010/11 season. Production is currently estimated near 4.2 million tonnes from 4.4 million for the season just ended. German beet tests show a slight improvement of sugar content but officials are not too optimistic after the summer heat wave. Sugar production is expected to come in near 3.65 million tonnes from 4.2 million last year. Some recent talk of increased exports from India into the first quarter may have helped limit the advance.

TODAY’S GUIDANCE: With a production deficit from China and the potential for storm damage, the market remains in a steep uptrend. For now, close-in support for March sugar is at 28.09 with 29.07 and 29.90 as next targets.

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Weather issues have nicked away at the outlook for a world production surplus this season and talk of a tighter supply into the first quarter has helped support. In addition, the market is seeing additional support overnight from another drop in the US dollar and another new all-time high in gold. The rally in sugar prices in Brazil and talk that Brazil producers are buying back previously booked sugar from the trade has added to the positive tone over the past few days. In addition, Australia production for the 2010/11 season is being threatened by too much rain in the north eastern growing regions. Producers believe that production for the season could reach just 4.2 million tonnes from 4.4 million this past season. Iraq is tendering for 200,000 tonnes of white sugar. March sugar closed slightly lower on the session yesterday but managed to consolidate most of Tuesday’s strong gains. The weather outlook for Brazil is seen as a slightly negative development for the market with more good rains in the center-south region this week and a return to drier weather next week which should boost harvest progress and also allows for improved soil conditions for next year’s crop. Traders see the potential for some tightness of available sugar for export on the world market during the first quarter of next year as Brazil production slows. Beet production was stunted with a drought in Germany this year and traders are not too optimistic for yield and production totals this season.

TODAY’S GUIDANCE: Outside market forces are supportive again this morning and the lower than expected production outlook for many smaller producers plus mixed ideas for Brazil crop potential for next year has helped provide support. The gold rally is helping attract some new buying to sugar but more importantly, the rally is helping the market avoid fund selling. Close-in support for March sugar comes in at 23.58 with resistance at 24.26. A move through resistance will leave 26.44 as next upside target.