The government was toying with reducing the mandated minimum 25% ethanol blend in car fuel to ease the pressure on tight supplies, but has recently abandoned the idea.
Looking ahead, there is little chance that sugar production will capture any significant increase in its share of the cane crop.
Production costs for sugar have risen over the years, another reason that we’d be hard pressed to see a meaningful drop in the ethanol/sugar output ratio going forward. Over the past several years, costs have increased from the low teens to over 20¢ per pound. That’s a powerful bullish case for further price gains that would allow prices to rise enough to provide incentive for higher sugar output.
The leap in Thai production has been well known for many months and has obviously not played much of a role in alleviating pressure on the market from the smaller-than anticipated Brazilian output. For that matter, we believe, that with estimates still ticking down, the market has not yet fully absorbed the potential fallout.
The early forecasts for a 2011-12 global sugar surplus in the neighborhood of 10 million tonnes have shriveled dramatically. Estimates are all over the place, but a recent estimate by a statistician at F.O. Licht put the global surplus at a scant 800,000 tonnes.
Our May 18 recommendation, with sugar hovering near the lows of the correction, at about 21¢ per pound was: "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."
So far so good. Raise stops to 26¢ per pound, basis October, close only.