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.
India is expected to have a surplus for its 2010-11 marketing year, which runs from October through September. This is a dramatic reversal from the previous two deficit seasons which turned the self sufficient and well-stocked country into an importer. Most production estimates hover around 24.5 million tonnes, up from 18.8 million tonnes in 2009-10. A recent estimate puts consumption at 22.5 million tonnes. A 500,000-tonne export license has been bandied about over the past few months, and the government is procrastinating over the move. A decision was expected in December.
We’ve pointed out in past articles on sugar that even with the surplus, Indian ending stocks will be half – or less – of what the heavy sugar-consuming nation was accustomed to before the two consecutive drought-plagued seasons in 2008-09 and 2009-10. We find the 22.5-million-tonne usage figure that has been appearing in press reports recently to be somewhat on the low side. Average consumption in the past three years has been about 24 million tonnes, and we don’t know any rationale for such a sharp drop. If consumption is actually in line with the past few years, then the surplus is minuscule and it would explain why the government has been dragging its feet on issuing export licenses.
Indian exports would be bearish in the near term. Australian exporters saw their exportable surplus slashed by about 35%, or 1.2 million tonnes. Indian exports would provide significant compensation. Lower ethanol production in Brazil and the threat of Indian exports could pressure prices. Still, the pool of available sugar for world trade is tight and makes prices vulnerable to further rallies. Despite the potential for slightly bearish fundamentals on the horizon, sugar statistician Czarnikow on March 1 increased its deficit forecast for the global balance sheet, to 3.7 million tonnes, from 2.8 million tonnes.
Remain long. Raise sell stops to 26.50, basis May, close only.
Sholom Sanik is an analyst with Friedberg Mercantile Group Ltd. He can be reached at firstname.lastname@example.org
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