Sugar prices spiked to 36¢ per pound in February. It was short-lived, though, because while prices were at multi-decade highs for a good part of the past several years, farmers in sugar producing nations were expanding acreage to take advantage of the high prices. As a result, the global balance sheet moved from deficit in 2009-10 to a small surplus in 2010-11. As the season progressed and individual country estimates became more accurate, prices had nowhere to go but down.
Among key producing countries, India has returned to normal levels after two consecutive drought-afflicted seasons. With current estimates at just below 25 million tonnes, the size of Indian output has not varied very much since early acreage-based estimates were released.
A major factor that facilitated the drop in sugar prices over the past few months is Thai production. Annual production has averaged about 7 million tonnes in recent years. Early season estimates put 2010-11 output at 6.8 million tonnes, but as the harvest season wore on, it became clear that yields were going to be extraordinary. Based on recovery rates thus far in the crushing season, analysts expect total output to reach 9 million tonnes. This leaves 3 million tonnes of previously unexpected sugar available for export to the Asian market.
Pakistan also surprised with output of about 300,000 tonnes more than anticipated.
The record cane crop forecast for Brazil certainly contributed to the drubbing the market has taken. However, just over the past week, statistics regarding the progress of the Brazilian crush have emerged, which may very well have halted the slide in prices.
A very wet April made harvesting extremely slow. By May 1, sugar and ethanol processors had crushed only about 30% of the volume that they had last year at this time. Yield has suffered because of the weather as well. At present, sugar content is estimated to be down 11% from last year. It will dry up eventually, and the harvest will accelerate. However, it would seem that some irreparable damage to total output has occurred.
Moreover, in the early part of the crushing season, the ethanol/sugar ratio tends to be higher, because the cane’s sugar content is not as rich as it is later in the season, which makes ethanol production more profitable. The forecast for the ratio for the 2010-11 marketing year is 54.7/45.3 in favor of ethanol, which is lower than the average ratio of recent years. Industry analysts are reporting that the ratio is currently running at 64.6/35.4.
Over the past few months ethanol prices rose sharply, and although prices of sugar were at multi-decade highs as well, ethanol production had an edge. An extremely high rate of ethanol output was the obvious result.
As ethanol from the new crop became available, however, prices came off as sharply as they rose. But so have sugar prices, so it will be very interesting to watch carefully for ratio estimates as the crushing season progresses. Either way, sugar output has taken a hit, and we believe it is very unlikely that the 35-million-tonne estimate for the center-south region, which grows 90% of Brazilian cane, will stand.
The two big surprises – bearish from Thailand and bullish from Brazil – may cancel each other out.
Early forecasts for 2011-12 are looking for a comfortable surplus. The range of estimates is wide, from 3 million tonnes to 10 million tonnes. The optimistic surplus forecasts for both 2010-11 and 2011-12 seem to have included the Thai revisions, but probably have not accounted for the full potential impact of the bullish Brazilian estimates.
We believe the market has fallen too hard and too fast. Despite the best efforts of farmers around the globe, it seems that the 2010-11 balance sheet will remain in a deficit position after all. Current price levels present an excellent low-risk opportunity to enter the long side. Buy October sugar at the market. Place initial sell stops at 20.50¢ per pound, close only.
