Weather weighs in on sugar market

by Editorial Staff
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Trees are budding in Indiana, and even around the Tidal Basin in Washington, D.C., fear is growing that the cherry blossoms will arrive in February. Sales of winter gear across the country have plummeted everywhere but the Pacific Northwest and Colorado. Colorado’s snow has accumulated in a foot thick blanket, not as skiers would hope in the mountains but rather in the flatlands such as the Denver airport. There have been so many flight delays in Denver this year that a businessman is proposing rental sleeper seats for the airport.

This abnormally warm weather has had temperatures of 10° to 20° above average winter norms from the Mississippi river to the beaches of New Jersey. In Chicago, a mid-December snow storm was the only evidence of winter to date. There are two important things to remember about this story. First, it is unlikely to continue, cold weather will hit the Midwest sometime between now and May 1. Second, it doesn’t matter. It is impossible to imagine a scenario where it would be cold enough for the remaining two months of winter to reverse the impact on such things as heating bills and snow plowing charges.

The impact on crude oil prices also has been significant. From April 2004 to July 2006, crude oil prices moved up with higher highs and higher lows as well. Having reached about $78/bbl in July 2006, prices slid and stabilized at just over $60/bbl. Then, despite production cuts by the Organization of the Petroleum Exporting Countries (O.P.E.C.) and the usual Mideast turmoil, slid further down below $60. This happened for a number of reasons, the primary trigger being the lower draw on heating oil caused by the warm winter. Other petroleum product prices have fallen as well, including gasoline.

The declining gasoline price has in turn put downward pressure on ethanol prices. Fortunately for ethanol producers, the same fund managers who are selling crude oil contracts to rebalance their portfolios are reducing their record long position of 300,000+ corn futures contracts. Corn prices have weakened, giving ethanol producers some respite on margins in the face of declining ethanol prices.

Weather has played a role in the sugar market in several different ways. In Mexico, the Sugar and Alcohol Chamber forecast the 2006-07 harvest to reach 5.65 million tonnes, a 7% increase from the 2005-06 harvest of 5.28 million tonnes. The Mexican sugar crop year begins Nov. 1 and ends Oct. 31. The actual harvest itself starts in mid-November, ending in July. This year, in what is becoming a Mexican tradition, the harvest began with a strike of workers and growers. This delayed harvest. The situation was further impacted by weather with a freeze in Jalisco and too much rain in Tabasco depressing output. The impact of these events could reduce the entire crop in those regions.

As of Dec. 30, 2006, after five weeks of harvesting and milling activity in Mexico the sugar outturn was down 18% from the same period a year earlier, according to the government run Agro-Industry Committee. Yield of sugar per ton of cane also was down from a multi-year average of 9.47% to 9.1% this year-to-date.

Theoretically, the less sugar the Mexican growers produce, the less Mexican sugar will need to find an outlet in the United States. With high-fructose corn syrup imports from Mexico set for 2007 by trade agreement and with HFCS capacity utilization in the U.S. because of grind management, there should be no extra pressure on Mexico to move more sugar to the United States. Although the Sugar Chamber in Mexico is working on a 5.4 million-ton sugar crop hypothesis, a reasonable guess might be closer to last year’s output.

This is also important because weather has been kind to U.S. beet and cane growers. Sugar beets, not having been subjected to freezing and thawing, but rather refrigerated, have been processing well. Last year’s weather produced good yields on many growing areas. The U.S. Department of Agriculture’s forecast for U.S. beet sugar production in fiscal 2007 has climbed for the last few months with each WASDE report — rising 191,000 tons, raw value, last month to 5.092 million tons for the year. It is possible that the actual outturn for the crop year will be even larger.

With no hurricanes impacting the crop in the past year, cane sugar production has rebounded from 2.955 million tons in fiscal 2006 to a projected 3.603 million tons in fiscal 2007. With the tariff rate quota, now admitted in Senate testimony by the successor to

J. B. Penn at the U.S.D.A. to have been too high in the first place, the U.S. sugar market will be more than amply supplied without excess Mexican sugar entering the market.

Weather will continue to be a significant factor as the crop year progresses. A string of freezes and thaws could still impact the eventual beet outturn negatively. Similarly, a freeze in Florida might impact next year’s crop.

Overall the moisture outlook has improved over much of the country. The warm weather has been accompanied by good moisture. Snow has fallen in areas such as Colorado where drought conditions have improved significantly. The National Weather Service map for the first quarter of 2007 shows only a small area across the northern tier of states where drought persists.

Weather will assuredly impact the markets again before crops are planted and harvested in 2007.

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