Sugar supply increases can't quell bulls

Sugar prices peaked at 35¢ per pound in early February and subsequently shed 15%. The selloff was due partly to a general lull/correction in many commodity markets, but also because of some sugar-specific developments. Support emerged at the 30¢- per-pound level (see chart).

The direction of developing fundamentals is somewhat unclear, with uncertainty about the Brazilian crop and the sugar/ethanol ratio. The official start of the Brazilian 2011-12 marketing year is in April, but the harvest in some regions has already begun. Dryness during the growing season last year has lowered yields. Precipitation levels recovered early in 2011, which was beneficial for yields, but will be a drag on the harvest. Estimates vary, but the size of the cane crop will be close to last year’s, and any changes in sugar production will be the result in swings in the sugar/ethanol crush ratio.

With sugar prices at multi-decade highs and a tight market abroad, there is obviously a strong incentive to slant the sugar/ethanol ratio in favor of sugar production. The ethanol market in Brazil is far more mature than in any other country in which ethanol blends have made serious inroads – including the United States. The government requires gasoline to contain a minimum of 25% ethanol, and it’s been that way for years. A significant percentage of the country’s cars are flex fuel, which means the consumer can use the government-mandated lend or 100% ethanol. The point is that there s not too much room for consumption growth. The below chart from Reuters shows that the increase in the amount of the sugar-cane crop dedicated to ethanol over sugar plateaued several years ago.

As the 2011-12 crop enters the harvest season, forecasts for the key ratio vary. According to one estimate, the sugar portion will rise sharply to 47%, up from 44.7% in 2010-11, which translates roughly into an additional 1.5 million tonnes of sugar available for export. A more recent estimate by sugar analyst Kingsman SA, however, puts the ratio much closer to 2010-11 levels, at 45% sugar and 55% ethanol.

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