Commodity Brazil

Commodity Trading can be difficult!

However, a basic understanding of the natural supply and demand cycles of commodities markets may help alleviate this.

To understand commodity prices, you need to be aware of the production and consumption of the commodity in question.

Some contracts are based on annually produced commodities: Corn, Wheat, Soybeans, Cotton, Cattle, Hogs, etc.

An annually produced commodity tends to have supply available at harvest while demand is variable, and segmented throughout the year.

Annually Produced Commodities

These commodities tend to exhibit the most strength historically at the beginning of their production cycle.

For example, Grain Futures are typically the most likely to rally during field preparation until planting is completed.

Market Overview - Sugar

According to UNICA, the sugarcane growers’ association, crushed cane
volume in Brazil’s Central-South (CS) from the 2009/10 harvest totaled
442.6 million tonnes through November 1, 7.2% up on the same period
in the previous harvest, despite the increased rainfall. On the other
hand, ATR (total recoverable sugar) was badly affected, falling to
132.6kg/t, 6.4% less than the 141.6kg/t in the previous year. The
production mix continued to prioritize sugar, which absorbed 44% of
crushed cane, 3.5 p.p. up on the previous season, with 56% going to
ethanol. As a result, sugar production came to 24.7 million tonnes, 9.1%
up year-on-year, while ethanol output declined by 5.2% to 19.2 billion
liters, 14.2 billion liters of which hydrous, up by 6.5%, and 5.0 billion
liters anhydrous, down by 28.0%.

UNICA has also recently published its revised harvest estimates, given
the lower number of available harvest days and the reduced ATR,according to which crushed cane volume in Brazil’s Central-South should reach 529.5 million tonnes, 3.7% down on the initial estimate,but still 4.9% up on the 505.0 million tonnes recorded last year. ATR is now expected to total 134.9 kg/t, 4.5% down on the initial estimate of 141.2 kg/t and 4.3% less than the previous harvest. With the higherthan-expected sugar ratio (43.1%, versus the initially forecast 42% and 40% last year), Central-South sugar output should reach 29.4 million tonnes, 5.6% less than expected, but still 9.7% more than in the previous season. Ethanol production, on the other hand, is expected to total 23.7 billion liters, versus 25.1 billion last year and 9.6% lower than the initial forecast. According to our own estimates, 28 days of crushing were lost through October 31 to rainfall, versus the historical average of13 days for the same period.

Sugar output from the new Indian harvest is expected to remain close to 16 million tonnes. Cane production was jeopardized by the lack of monsoon rains at the beginning of the inter-harvest period in the main
producing regions. The government continues to adopt measures to increase domestic sugar supply, given that prices are close to record levels. The most recent such measure was limiting inventories forindustrial consumption to 15 days of demand, having already restricted the inventories of trading companies and dealers to 30 days.

Recently, the Indian federal authorities announced a “fair and remunerative price” (FRP) for sugarcane of Rs 1,298.4/t (US$27,9/ton of sugarcane), to remain in force during the 2009/10 harvest (Nov/09–
Oct/10, in India), replacing the statutory minimum price (SMP), which had already been raised to Rs 1,077.6/t (US$27.9/tones of sugarcane).However, the FRP is still below sugarcane prices established by certain states, such as Uttar Pradesh (Rs 1,650/t), Tâmil Nadu (Rs 1,437.4/t)and Punjab and Haryana (Rs 1,700 and Rs1,800/t, respectively). Although the Maharashtra state government has not imposed a fixed
price, growers there are receiving between Rs 2,000 and Rs 2,500/t. Although this is the highest level for 10 years, it is worth noting that the prices of the major competing crops, such as rice, corn and wheat, havealso been increasing.

Indian government establishes “fair andremunerative price”International raw sugar prices averaged 20.52 US¢/lb in the 2Q’10,39.7% up on the previous quarter and 57.7% more than the same period in 2008 (July, August and September). Despite the appreciation of the Real against the dollar in the 2Q’10, the average price of sugar in Reais increased by 25.8% year-on-year to 38.23 R$¢/lb.

International refined sugar prices continued their upward trajectory, averaging US$523.26/t in the 2Q’10, 21.9% up on the previous quarterand 35.8% more than the same quarter last year. The white premium,comparing LIFFE#5 and NY#11 maturities in March 2010, closed the quarter at US$105/t, reflecting expected demand for refined sugar.

Sugar exports totaled 12.7 million tonnes in the harvest year to date,26.4% up year-on-year. India was still the main destination, absorbing around 20% of the total, followed by Saudi Arabia (9.4%) and Russia
(7.6%).Domestic crystal sugar prices (ESALQ) averaged R$47.37/50kg bag (or R$ 947.34/t) in the 2Q’10, 6.6% up on the previous quarter and 63.3% up on the same quarter in 2008, reflecting the combination of strong
sugar exports and the downturn in production due to the atypically high rain fall.