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June 2009

Wheat

Major exporter production to fall in 2009/10

Rabobank estimates suggest a 10% rally in USD in 2H 2009

Green shoots of economic recovery appear uncertain

Developing El Niño weather pattern threatens to destabilise Australian production

Soybeans Old crop supplies remain extremely tight Chinese demand and US crush remain strong 2009 world demand reliant on US production USDA upward revision on planted acres in June

Corn

USDA acreage revision loosens 2009/10 balance sheet

Significant speculative money flow out of corn long

Late plantings in the US increase yield risk

Positive margins for ethanol and animal feed sector to

support demand

Sugar Deficit of 7 to 8 million tonnes expected for 2008/09

international crop year Prospect of another deficit in 2009/10 Concern that recent slow progress of Indian monsoon

could affect crop prospects [

Rabobank Agri Commodities Monthly

Wheat, Corn, Soybeans and Sugar

Agri Commodity Markets Research Food & Agribusiness Research and Advisory

Luke Chandler +44(0)2076649514

www.rabobank.com/far

Figure 1: Wheat Prices (CBOT) April – July 2009

Source: Rabobank, Bloomberg

Figure 2: Soybean Prices (CBOT) April – July 2009


Figure 3: Corn Prices (CBOT) April – July 2009


Figure 4: Sugar Prices (ICE - NYBOT) April – July 2009


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Wheat

Key Market Drivers

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Major exporter production to fall in 2009/10 Developing El Niño weather pattern threatens to destabilise Australian production Rabobank estimates suggest a 10% rally in USD in 2H 2009 Green shoots of economic recovery appear uncertain Northern Hemisphere harvest to weigh on near-term prices

Prices World wheat prices collapsed in June, with the major exchanges in Chicago and Paris shedding 21% and 12%, respectively. Little has transpired from a fundamental point of view to justify the recent volatility in wheat prices. The outside influences of exchange rates, speculative money flows and macroeconomic variables are the driving forces. Fundamental developments did not justify the 30% rally in CBOT July 2009 wheat prices in May, and similarly there has been little development from a wheat market perspective to reflect the collapse in prices. That being said, prices do appear to have corrected to a level more reflective of their fundamental fair value level. Based on Rabobank expectations of a strengthening USD over 2H 2009 together with a relatively burdensome fundamental balance sheet, Rabobank has lowered its wheat forecast slightly for the next 12 months. While short-term volatility and the role of speculator/investor money flow will continue to have a significant influence on price movements, Rabobank analysis suggests fair value wheat prices on the CBOT are between USD 5 to 5.50/ bushel, with further downside movements limited by a supportive corn outlook and upside likely to be constrained by exchange rate pressure and a lack of bullish fundamentals.

The CBOT wheat future curve is currently in a contango, reflecting the relative near-term supply sufficiency in the market and the cost involved to finance, insure and store stocks into the future. With the harvest of the Northern

Hemisphere new season (2009/10) crop underway, this contango is expected to continue and perhaps even strengthen given the build up in global wheat stocks and lack of any significant production issues. Rabobank’s price forecast for CBOT wheat prices reflects this neutral outlook for wheat prices.

Wheat Fundamentals While weather developments in June have provided some limited supportive fundamental news (including planting delays in the US, dry conditions in eastern Europe, planting issues in Argentina and lower production estimates for Canada), on-balance fundamentals for wheat remain relatively neutral current levels. Seasonal conditions have remained favourable in a number of the major importing regions of the world such as North Africa and the Middle East. In addition, wheat production in both China and India has also progressed well this season with neither country likely to need imports in 2009/10. The Indian government has procured record levels of wheat in the past two seasons and may need to export for the first time since 2004/05. The threat of a strengthening El Niño weather pattern may impact Australian production and, hence, world net exportable surplus late in 2009. While in previous seasons this scenario created a bullish global price environment, in 2009/10 world wheat stocks are more than likely going to increase for the second successive season, limiting the potential impact of an El Niño development this season.

Figure 6: Rabobank Wheat Price Quarterly Forecasts (CBOT)

Q2 2009 – Q2 2010

Source: Bloomberg, Rabobank forecasts

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US The USDA surprised the market 30 June by lifting their estimate for winter and spring wheat planted area by 559 and 468,000 acres, respectively, despite adverse weather conditions during spring planting. All wheat acreage for 2009/10 is forecast at 59.8 million acres, 1.1 million acres higher than the USDA’s previous estimate 31 March. The USDA also released its 1 June stocks estimate of 667 million bushels, in line with market expectations and reflecting a weak export performance in 2008/09. Based on the revised USDA all wheat acreage number together with the yield forecast from the USDA 10 June WASDE report, new crop 2009/10 production is projected to reach 2.4 billion bushels. This represents a 4% fall in production year-on-year (YOY) and would result in a further build up in US all-wheat stocks, based on a weaker demand profile, possibly increasing stocks to their highest level since 2001/02. EU27 Dry conditions over parts of Europe in recent months have resulted in production setbacks on earlier forecasts. Strategie Grains have trimmed their forecast of European soft wheat by 2.6 million tonnes in June to 126.3 million tonnes, a 9.8% decline YOY. Production cut backs in eastern Europe have been the most severe with the Polish grain chamber cutting its forecast 29 June to 26.8 million tonnes from 27 million

tonnes, a 3.2% decline YOY. Area shifts to corn and recent floods in the south of the country are the major drivers. Likewise, Hungarian, Bulgarian and Czech production is forecast down 28.5%, 20% and 17% YOY to 4, 3.5 and 3.9 million tonnes, respectively. The new crop demand scenario for EU27 wheat appears somewhat balanced with stronger domestic industrial use for ethanol and animal feed likely to be offset by a weaker export profile. For example, new-crop French exports are forecast to be lower based on the sharp increase in production in its major trading partners Morocco, Algeria and Tunisia. To put this in perspective, these countries have accounted for 60% of French wheat exports in the first nine months of the 2008/09 marketing season. Black Sea Above average temperatures have been experienced throughout June, although no material impact on production has been reported at this stage. According to UkrAgroConsult, wheat production in the Ukraine, Russia and Kazakhstan is forecast to reach 19.4, 58 and 14.2 million tonnes, down 20%, 9% and up 13%, respectively, with lower YOY yields the major driver. Aggregate Black Sea wheat production is forecast to fall 11% and exports 18% YOY. Interestingly, total area planted to wheat is estimated to have increased 5% YOY, despite widespread expectations of a decline in plantings due to perceived credit constraints and lower world prices. A reduction in fertiliser application has been reported following the withdrawal of government subsidies and—together with a return to normal seasonal conditions following last season’s idyllic conditions—a 12% fall in Black Sea yield in 2009/10 is forecast. Despite the fall in production, Black Sea exports are set to remain a price leader for the world wheat market in 2009/10. Intergovernmental agreements between Russia and Egypt will only strengthen the Black Sea’s status as the major exporter into this region. Australia Solid rainfall throughout Australia’s grain growing regions in June has resulted in a marked improvement in production prospects for 2009/10 crop. In particular, Western Australia has now received good falls across most regions. Thus, while it is early days, wheat production is forecast to reach 22.8 million tonnes. That said, a key risk to this year’s crop is the increased likelihood of an El Niño weather pattern. El Niño patterns are usually—but not always—associated with below normal rainfall in the second half of the year across large parts of southern

Figure 7: World Wheat Supply and Demand

Source: Rabobank, USDA

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Australia and can lead to severe yield penalties. At this stage, the Australian Bureau of Meteorology rank the chance of an El Niño pattern over spring 2009 at above 50% with the Southern Oscillation Index, a measure of air pressure differentials, shifting from positive to minus, a trend reflective of El Niño developments.

Argentina So far, a little over 900,000 hectares have been planted with wheat, which is 50% lower than what was planted at this point last year (and 70% below 2007/08). This delay in planting progress is due to low soil moisture levels. Final plantings are forecast to reach 2.8 million hectares, although this may be subject to further cuts. Final production remains uncertain at this stage, falling within the range of 6.5 and 7.5 million tonnes. Taking these estimates into account, it is likely that only around 1 million tonnes of wheat will be available for export in the coming year. Canada A cold spring and variable moisture across the Prairie provinces is driving uneven yield outlooks for Canadian grain and oilseed producers. As expected, spring wheat acreage is estimated up 7.3% YOY at nearly 17.1 million acres. The Canadian Wheat Board (CWB) announced 2008/09 higher YOY payments for wheat and Durum. The monthly Pool Return Outlooks (PRO) were also announced, with the durum values up CAD 1 to 4/tonne from the last PRO, with other wheat classes

stable, with the exception of Canada Western Soft White Spring, which is down CAD 5/ tonne. India Wheat stocks with Food Corporation of India as of 1 July 2009 are 36 million tonnes as opposed to the buffer norm of 17 million tonnes. Due to the uncertain monsoon, the Indian government is holding the stocks and not considering exporting them. If the monsoon is normal during the month of July, wheat exports of around 5 to 6 million tonnes appear feasible based on the abundant stock build up. China The National Grain and Oils Information Centre released their newest projection on the planting area and output of wheat 12 June. The 2009 planting area is estimated to reach 24 million hectares, up slightly (0.4%) YOY, with a production estimate of 113.2 million tonnes, up 0.66%. Despite the negative effect of the drought in north China early in 2009, subsequent improved seasonal conditions have boosted yield to remain at the same level as last year, though there are some quality issues. The Chinese government is supporting wheat prices with its 2009 wheat purchase program. Currently, the purchase floor prices of white wheat, red wheat, and Mix Wheat are 1,740 RMB/metric tonne, 1,660 RMB/metric tonne, and 1,660 RMB/metric tonne, respectively. The price of wheat in production regions was 1,820 RMB/metric tonnes 18 June.

As the domestic wheat price is higher than the international price, wheat export remains weak. From January to April, the export volume was 36,000 metric tonnes, down 97.1%. By contrast, the import volume reached 156,000 metric tonnes, while it used to be zero during the same period last year. This indicates that China could become a net importer in 2009.

Outlook

Weather conditions in the Northern Hemisphere will dominate world wheat market focus over the coming months as harvest takes place. Global production is forecast to fall in 2009/10 but so is demand as a number of the major importing regions are reporting improved production prospects this season. Rabobank sees current new crop December futures of USD 5.50 as around fair value levels. A developing El Niño weather system threatens to upset the balance of relatively favourable seasonal conditions. However, this is not likely to have a material impact on prices this year.

Figure 8: El Niño Development Strengthens

Source: Australian Bureau of Meteorology

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Corn

Key Market Drivers

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Late plantings in the US increase yield risk Positive margins for ethanol and animal feed sector to support demand USDA acreage revision loosens 2009/10 balance sheet Rabobank estimates suggest a 10% rally in USD in 2H 2009 Significant speculative money flow out of corn long

Prices Corn prices have collapsed in June reflecting both an improvement in seasonal conditions, with the US crop now fully planted following earlier delays and a re-emergence of global economic uncertainty. Sentiment has weakened from March and April with the ‘green shoots’ of economic recovery looking decidedly less certain and resulting in a substantial withdrawal of speculators and investors from all commodity markets. According to data from the US Commodity Futures Trading Commission (CFTC), non-commercial’s or speculators in the CBOT corn market have liquidated their net long position from 132,563 contracts 9 June to 45,121 contracts 23 June. This represents a 66% decline in the net long position of speculators in only two weeks. Adding to this rapid downward momentum in corn prices, the USDA announced its new crop acreage revision and stock updates on 30 June which re-shaped the fundamental ledger for the 2009/10 season. These announcements were extremely bearish for new crop corn prices and caught the market by surprise, resulting in CBOT corn futures trading limit down for the day. Nearby corn prices have suffered one of the sharpest month-on-month (MOM) declines on record, dropping 20% to close the month at USD 3.47/bushel.

Based on this new fundamental scenario, Rabobank has revised its projected corn price curve lower to reflect a more comfortable supply/demand balance in 2009/10. A significant portion of the US growing season still remains, but with the crop currently rated as 70% good to excellent only a significant weather event or a rapid pick-up in new

season demand could result in a bullish scenario for corn prices. Given Rabobank expectations of a 10% strengthening of the USD in 2H 2009 together with this new fundamental base, December 2009 corn futures fair value is now below USD 4/bushel. The weather, a return of speculators or an unexpected uptick in demand through additional discretionary blending, feed consumption or exports could result in a shift above the USD 4/bushel level.

Corn Fundamentals US US corn fundamentals for the 2009/10 season have been turned on their head in June with the USDA announcing significant revisions to their 31 March plantings estimate. In one of their largest March to June revisions on record and totally against market expectations, the USDA lifted their corn planting estimate by 2.05 million acres to 87.04 million acres, despite one of the slowest corn planting paces in history. The increase in corn acres was also surprisingly high given the outperformance of soybean prices relative to corn during the spring planting window. Based on the current USDA yield estimate of 153.4 bushels/acre from the USDA 10 June WASDE report, these additional acres will add around 314 million bushels of corn to the 2009/10 crop. As a result of this and the higher than expected 1 June corn stock number of 4.37 billion bushels also announced by the USDA 30 June, forecasts for new crop stock levels have now risen from an extremely tight stocks to use ratio of around 7% to a more comfortable 13%.

Figure 10: Rabobank Corn Price Quarterly Forecasts (CBOT)

Q2 2009 – Q2 2010 Q2 2009 – Q2 2010


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Corn demand trends appear weak with the March to June quarterly use of 2.7 million bushels below market expectations. According to the Energy Information Agency (DOE), ethanol production fell by 3% in April MOM. In addition, US corn crop prospects remain sound. The National Agricultural Statistics Service (NASS) department of the USDA pegged the corn crop as 72% in good to excellent conditions as of 28 June.

Brazil As a result of the drought and frosts that damaged the second crop development in southern Brazil, winter crop production was revised downwards in Conab’s (National Food Supply Agency) June report. The winter crop is now estimated at 16.7 million tonnes, 10.7% lower than the 2007/08 crop. Brazilian corn exports from January to May totalled 3.2 million tonnes—26% higher than last crop’s exports—as a consequence of high international prices and a strong US dollar. Based on the expectation that international prices would continue at high levels in 2009 and the fact that Brazilian corn exports are generally higher in the second half of the year, more than 8 million tonnes of corn are expected to be exported in the 2008/09 season. Argentina The 2008/09 corn harvest is almost finished, with a final production of 12.5 million tonnes. This is 8.5 million tonnes lower than the previous year. Looking forward to the 2009/10 season, Rabobank estimates a downward adjustment in the area, with a similar production result as this year. But with even lower beginning stocks, the corn market for 2009/10 can be expected to be relatively tight,

with an exportable surplus of only around 4 to 5 million tonnes. China On 12 June the National Grain and Oils Information Centre adjusted the projection on the planting area and output of corn in 2009. The 2009 planting area would be 29 million hectares, with a slight increase of 0.7% over 2008. The output would be 163 million metric tonnes, down 1.8% due to the decreasing yield.

On the demand side, the industrial usage of corn went down in terms of volume, due to the global financial crisis and the Chinese government’s restrictive approach to corn deep processing industry. To support corn processors, the government raised export rebate from zero to 5% on corn starch and ethanol, effective 1 June 2009.

Outlook Rabobank’s corn price outlook has undergone a significant revision in June, following the USDA’s new crop acreage updates. 2009/10 fundamentals have shifted from a potentially bullish bias to a more neutral to bearish outlook, provided there are no major weather disruptions in the US. Demand parameters also remain weak at this stage of the economic recovery, although the sharp drop in December corn futures during June has helped ethanol and animal feed margins and appears to have sparked some export demand. Corn futures in July will trade on weather developments in the US, exchange rate movements and further macroeconomic developments, which are likely to guide speculative money flows.

Figure 11: US Corn Supply and Demand


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Oilseeds

Key Market Drivers

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Old crop supplies remain extremely tight Chinese demand and US crush remain strong 2009 world demand reliant on US production USDA upward revision on planted acres in June Rabobank estimates suggest a 10% rally in USD in 2H 2009

Prices Soybean price volatility has continued throughout June with the market focused on an extremely tight old crop balance sheet brought about largely by South American crop failure and record high Chinese demand in 2008/09. In contrast, new crop November futures prices have eased in June under pressure from a broader sell-off in commodities and a rebuilding of US and global inventories in the 2009/10 season. These divergent pressures between old crop and new crop soybean prices have resulted in calendar spreads appreciating sharply in June. The spread between old crop (July 2009) and new crop (November 2009) CBOT soybean futures has been developing since the start of the year as the seriousness of the drought in Argentina became clear and the market reacted to an acute tightness in the net South American exportable surplus. Prices for the old crop July contract exploded, shifting the soybean forward curve into a sharp backwardation with the premium for the July contract moving from zero at the start of January to a peak of USD 2.45/bushel. The futures market has shifted into a demand rationing function to ensure adequate supply for the remainder of the 2008/09 season. While old crop supply tightness has justified the bullish rally in July soybean prices in 1H 2009, new crop fundamentals are forecast to be more balanced and, as such, Rabobank’s price forecast indicates lower prices until mid-2010 versus recent peaks, as reflected by the CBOT soybean forward curve.

The market is expected to continue pricing in a weather risk premium over the next few months as the US crop develops and world supplies remain tight. It is worth remembering that even though a recovery in South American production is expected in 2009/10, these

supplies will not be available until March/April 2010. As such, the market will be extremely sensitive to any unfavourable weather developments in the US. This should help limit downside price risks at least until Q1 2010.

Likewise, the market will continue to monitor US soybean crush and export rates to gauge demand levels versus on-going tight supplies. At this stage, US crush margins remain positive, and there is little to suggest that Chinese demand is wavering. Soybean Fundamentals US

New crop production prospects have been boosted in June with the USDA lifting their acreage estimate by 1.46 million acres to 77.48 million acres, a 2% increase on last season. This increase in plantings was widely anticipated by the market based on the strong price performance of soybeans during the plantings window. July 2009 soybean prices jumped nearly 30% between March and June. US soybean production is projected to reach a record high of 3.25 billion bushels in 2009/10 based on the USDA’s higher acreage base together with their 10 June WASDE yield estimate of 42.6 bushels/acre. A lower reliance on double cropping this season should help support yield levels. Exports are forecast to run on pace with the record levels reached in 2008/09 at 1.3 billion bushels. World demand will again be reliant on US exports to bridge the gap on South American shortfalls until Q2 2010.

Figure 13: Rabobank Soybean Price Quarterly Forecasts (CBOT)

Q2 2009 – Q2 2010


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Brazil The soybean harvest has finished in Brazil. Soybean production was again revised lower in Conab’s (National Food Supply Agency) June report, mainly because of prolonged periods of dry weather in southern Brazil. The Brazilian crop is now estimated at 57.1 million tonnes, 4.8% below the 2007/08 crop of 60 million tonnes. Based on the expectation that Brazilian soy exports in 2008/09 should remain at a similar level to the previous crop (around 25 million tonnes), domestic ending stocks should decline by 37%, totalling 2.9 million tonnes—the lowest level since 2005/06. As soybean planting in Brazil starts in September, Brazilian growers have already started to negotiate prices and buy inputs for the 2009/10 crop. Despite credit supply restrictions in the country, soybean area is likely to see a slight increase, mainly as a result of expected higher margins for soybeans when compared to corn and cotton. Argentina The final numbers of the soybean harvest for 2008/09 yielded a 32 million tonne crop, 30% lower than last year’s crop. The damage to agricultural crops came from persistent heat and drought. Average yields for the country as a whole were only 1.9 tonne/hectare, with 2.8 tonne/hectare in the best performing region. Soybeans will be the big winner in Argentina for the upcoming season. Much of the land from wheat and corn

will go into soybeans, resulting in preliminary estimates of a 19 million hectare crop in 2009/10. With an El Niño weather pattern bringing rains to the region by September, soybean yields are expected to be within normal levels, resulting in a predicted record harvest of 51 million tonnes. Canola Fundamentals Canada Canola production is estimated lower at 10.5 million metric tonnes. This is due to preliminary estimates of 2% less planted acreage (15.8 million acres) and unseasonable frost and late planting, which can lead to use as greenfeed. Prices have been mostly higher on supportive weather concerns, even with some long liquidation weighing on currency. Exports are still up YOY, even with declining sales to the US. Flaxseed acreage is estimate up 10.3% to 1.7 million acres—the second consecutive annual increase. Soybean acreage is estimated at a record 3.5 million acres. Australia Widespread rainfall in June has provided a much needed boost to the outlook for Australian canola production in 2009/10. While total area in Australia is expected to be higher than last year, in Western Australia—the largest producing state—a mixed start to the season has reduced area and yield expectations. In South Australia, Victoria and New South Wales (NSW) solid early rains have lead to increased plantings, up 10% to 20% from the 2008/09 season. Recent good rainfall has improved yield expectations. Above-average yields are expected in northern NSW, the western districts of Victoria and the southeast of South Australia. The improvement in seasonal conditions has been reflected in the ASX canola January contract price–now trading at AUD 516.50/tonne after trading at AUD 570/tonne for most of June. Outlook Price support and volatility are likely to continue until US yield and production prospects are more certain. Near-term global supply remains extremely tight, and prices will need to continue to ration demand levels until the US harvest. 2009/10 fundamentals remain more balanced, but with Southern Hemisphere supplies not available until March/April 2010, the world and particularly China will continue to rely on US exports. At this stage, demand appears robust and prices—while lower than their mid-year peaks—will remain supported.

Figure 14: US Soybean Supply and Demand


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Sugar Andy Duff Sao Paulo [email protected] +55 11 5503 7235

Key Market Drivers

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Deficit of 7 to 8 million tonnes expected for 2008/09 international crop year; Prospect of another deficit in 2009/10 Concern that recent slow progress of Indian monsoon could affect crop prospects Threat that demand could weaken temporarily if prices rise too far

Prices June 2009 was another spectacular month for international sugar prices. After losing steam somewhat in the middle of the month, New York raw sugar futures surged to US 17.9c/lb (basis October futures) on 29 June, powered by another wave of fund buying. This time, fundamental developments were at least partly responsible for the move. Concern had been mounting about the progress of the Indian monsoon, causing a number of analysts to speculate that Indian sugar production in 2009/10 could fall short of earlier expectations.

Sugar fundamentals July marks the beginning of the final quarter of the 2008/09 October/September international crop year. As a result, the market is increasingly focusing on the outlook for the 2009/10 crop year. The extent of any recovery in Indian sugar production is a key element of the equation for 2009/10, which explains the dramatic price developments described above in the wake of concerns regarding the impact of the delayed monsoon on cane production in India. It is probably a little early to draw conclusions regarding the monsoon´s impact on the crop. However, a reduction in the projected Indian rebound in 2009/10—which until last week was at 18 to 20 million tonnes, versus 14.7 million tonnes in 2008/09—would clearly deepen the projected deficit for next year and suggests an upward revision of projected Indian imports in 2010.

Of equal importance in the overall global balance—but even harder to gauge at this stage—is the prospect for cane and sugar production in Brazil´s Center-South in 2010 (which corresponds to the local 2010/11 crop year). If the growth in local ethanol demand continues to be robust and there is little or no growth in cane availability next year (a possibility given the continuing tight credit market conditions), then world market sugar prices will have to be sufficiently high to draw enough cane into sugar production rather than ethanol production. The exchange rate and gasoline price in Brazil will also play a pivotal role in establishing the relative attractiveness of sugar and ethanol production in 2010. The 2009/10 marketing campaign in the Center-South has yet to approach the halfway mark, so it may seem very premature to be discussing the 2010/11 campaign. However, a view on the Center-South´s prospects next year is necessary to develop a view on the prospects for the international 2009/10 crop year. Brazil Statistics from SECEX (the trade secretariat of Brazil´s Ministry for Industrial Development and Foreign Trade) illustrate that Brazil´s millers are responding strongly to the signals from the sugar market. Sugar exports in May 2009 totalled 1.57 million tonnes, versus 1.01 million tonnes in May 2008. UNICA´s numbers on the progress of the campaign to 16 June 2009 show that a total of 142 million tonnes of cane were milled up to that date in the Center-South—26% of the 550 million tonnes projected to be processed in 2009/10. The campaign is well ahead of

Figure 16: Rabobank Sugar Price Quarterly Forecasts (ICE)


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the previous year´s performance. At the equivalent stage last season, the industry had milled 108 million tonnes.

While the Center-South industry has been cheered by the development of international sugar prices, local ethanol prices have been extremely low in recent months. However, in the last two weeks the prices of hydrous and anhydrous ethanol have staged a weak recovery (for example, hydrous ethanol prices, ex-factory, are now around BRL 0.65/litre from BRL 0.61/litre in mid-June). Part of the gain has been attributed to the impact of rain on the pace of harvesting and milling over the past month. Nevertheless, anecdotal evidence suggests that local demand remains strong—evidence backed up by statistics for fuel and car sales. The industry will be hoping that these price movements signal the start of a gradual rebalancing of ethanol supply and demand. This is important because, to date, weak ethanol prices have threatened to offset much of the improvement in industry margins generated by high sugar prices. India Sugar production in 2008/09 is estimated to be 14.7 million tonnes, a sharp decline from 26.5 million tonnes produced in 2007/08. This decline is largely due to a shift of crops by farmers from cane to other crops such as soybean, paddy and wheat. Sugar recovery from sugarcane has been reduced by almost 1%. Sugar production in 2009/10 is expected to be in the range of 19 to 20 million tonnes. The timing and quantity of the monsoon will impact sugarcane output—and, consequently, sugar production—in 2009/10.

Ex-factory sugar prices in north India are likely to continue to operate in the range of INR 23 to INR 24/kilogramme over the next one to two months. Sugar prices could firm up in the next six to eight months, given the higher imports expected in 2009/10. However, the pricing also depends on various government policies, particularly a decision on whether to subsidise imports. Outlook Sugar futures registered another strong performance in June. Once again it appears that the funds provided much of the momentum behind the latest move, but this time it was at least partly on the basis of a potentially critical fundamental development in India. Also, the USD lost ground in the same week that sugar took off. The question is what level of downward revision of production in India is now priced into the market. Although there appears to be justifiable concern over the monsoon, it is still too early to draw conclusions. Rabobank believes an assessment at the end of July will provide a much better basis for evaluating this year´s monsoon. Also, regardless of weather patterns, early forecasts of Indian sugar production have not been very reliable in recent years. However, if weather patterns over the next month revert to normal, the market may be vulnerable to some profit-taking. The extent to which short-term demand will be impacted by current prices also remains a potentially influential factor.

Figure 17: Global Sugar Supply and Demand

Source: ISO, F O Licht, Rabobank

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Rabobank International

Report Author:

Luke Chandler London, United Kingdom [email protected]

Report Co-Authors:

Andy Duff Sao Paulo, Brazil [email protected]

Paula Savanti Buenos Aires, Argentina [email protected]

Vaishali Chopra Delhi, India [email protected]

S. Venkatraman Mumbai, India [email protected]

Luciano Broek Sao Paulo, Brazil [email protected]

Lief Chiang Shanghai, China [email protected]

Adam Tomlinson Sydney, Australia [email protected]

Chan, Wei Siang Singapore [email protected]

Karol Aure-Flynn New York, US [email protected]

Wayne Gordon Sydney, Australia [email protected]

Rabobank Food & Agribusiness Research and Advisory www.rabobank.com/FAR

Rabobank International

Rabobank - Global Financial Markets

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This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). RI is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. This document is directed exclusively to Eligible Counterparties and Professional Clients. It is not directed at Retail Clients. This document does NOT purport to be an impartial assessment of the value or prospects of its subject matter and it must not be relied upon by any recipient as an impartial assessment of the value or prospects of its subject matter. No reliance may be placed by a recipient on any representations or statements outside this document (oral or written) by any person which state or imply (or may be reasonably viewed as stating or implying) any such impartiality. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its affiliates to enter into a transaction. The information contained in this document is not to be relied upon by the recipient as authoritative or taken in substitution for the exercise of judgement by any recipient. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Insofar as permitted by the Rules of the Financial Services Authority, RI or other legal entities in the group to which it belongs, their directors, officers and/or employees may have had or have a long or short position and may have traded or acted as principal in the securities described within this document, (or related investments). Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities (or related investments) are described in this document. The distribution of this document in other jurisdictions may be restricted by law and recipients of this document should inform themselves about, and observe any such restrictions. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. By accepting this document you agree to be bound by the foregoing restrictions. © Rabobank International London Branch, Thames Court, One Queenhithe, London EC4V 3RL +44 (0) 20 7809 3000

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