On March 26 the Indian government announced that it will allow a further 1 million tonnes of sugar exports, in addition to the 2 million tonnes already approved for the 2011-12 marketing year. The move was largely expected, but the 3.5¢-per-pound rally that began in early January took a 50% haircut in the days following the news.
Indian sugar output has made a full recovery from the drought-reduced crop years of 2008-09 and 2009-10. Production is expected to be as high as 26 million tonnes, up about 7.5% from the previous season. Recent press reports put domestic consumption at 22 million tonnes, which seemingly leaves enough supply for a generous export policy.
Until the years of drought ravaged sugar output, India maintained inventories equal to about 50% of consumption. This season, after accounting for the new wave of exports, 2011-12 ending stocks will fall to about 6 million tonnes, roughly 27% of usage.
We’re skeptical about the modest estimate for domestic consumption of 22 million tonnes. The population is growing at about 1.7% per annum, and over the past few years estimates were quoted as high as 24 million tonnes. While consumption may have gone flat, it is unlikely to have fallen.
Flooding the market with its excess inventories appears to us to be a somewhat misguided strategy. The Indian government’s commodity policies have been influential in other markets of late as well – and have proven to be erratic. In early March cotton exports were halted to ensure domestic supplies remain at comfortable levels. The resulting rally sparked a limit-up move in cotton prices. Days later the ordinance was withdrawn, and cotton prices retreated.
Indeed, over the past few years, restrictive export policies for sugar were installed as soon as the domestic market showed any sign of tightness. Counting on India as a reliable exporter of last resort is not a sure thing. Allowing 3 million tonnes of exports is therefore bearish for the short term, but potentially bullish for the longer term outlook if India depletes its inventories to uncomfortable levels.
Weather in Brazil for the soon to be harvested 2012-13 crop has not been ideal. Production is expected to improve after last season’s uncooperative weather caused the first year-over-year drop in production in 11 years. But the crop will not reach the level achieved two years ago. Many plantations needed to be replanted, so full production is not expected until the following crop year, in 2013-14.
Brazilian cane output is shared by the sugar and ethanol industries. The government’s minimum ethanol blend requirement for cars was lowered from 25% to 20% back in October to alleviate a very tight market.
Export demand for ethanol competes with domestic demand. The market is so tight that Brazil has been importing from the US. In fact, Brazil is currently the largest foreign importer customer of US corn-based ethanol.
In 2011-12, 51.4% of the cane crop was used for ethanol. One early estimate puts this year’s ethanol portion at 53.8%.
Other important sugar exporters, such as Thailand and Australia, have had excellent crops. Exports will be at optimum levels. Analysts estimate that the global balance sheet for 2011-12 will show a surplus of about 5 million tonnes.
Nevertheless, the action in the sugar market over the past few years has demonstrated clearly that bull and bear markets in sugar result from surplus and deficits in Brazil and India. Everything seems quite comfortable now. India’s liberal export policy has served to ease the potential for tightness that could result from Brazil’s second consecutive year of subpar production.
Global demand for ethanol will continue to grow, and Brazil will remain under pressure to meet both domestic demand and deliver on its export commitments without sacrificing sugar output.
Maintain long May sugar positions. Place stops at 23¢ per pound, close only.