October sugar is trading close to 5¢ per pound, or almost 25%, above its early June lows (Chart 1). Developing bullish supply side fundamentals have overpowered both a strong dollar and worries about demand destruction that would result from the bleak global economic outlook.
Indian crops rely heavily on the amount of precipitation received from the June-through-September monsoon rains. From June 1 through July 23 the rains were 22% below average. On July 23, the government released its forecast for the whole season, revising its estimate downward to 92% of normal from 96% in June. The forecast is a bit optimistic in light of the performance of the monsoon thus far.
For sugar in particular, rainfall in two out of the three largest producing regions had significantly below-normal rainfall, while the other had excellent precipitation. Estimates for 2012-13 output range between 25 million and 26 million tonnes. That range of estimates, however, is virtually the same as it was before the monsoon season began, when there was no way of knowing how the monsoon would pan out. Again, it’s a tad optimistic to maintain early-season estimates when it’s doubtful that precipitation levels will be up to par.
Analysts keep talking about a 2012-13 surplus and inventory building. If the monsoon snaps back, perhaps. If it does not, output estimates will be reduced.
Conservative estimates put consumption at 23 million tonnes, which would leave only a small surplus. Indian exports for the current 2011-12 marketing year will reach 3 million tonnes, so there was not much inventory building this year either.
Excessive rains in Brazil that have lowered sucrose content are not news, but estimates for 2011-12 output are dropping. At present, production is running close to 30% below last year. That number is likely to improve, however, but not enough for Brazil to meet the needs of its traditional overseas customers.
When we last wrote about sugar on June 7 we said, “Some estimates put export availability as low as 20 million tonnes, down from estimates for 2011-12 that according to some analysts were as high as 24 million tonnes." At the time, that estimate was a bit of a stretch. Now, 20 million tonnes could very well be on the high side of the estimate range.
Another factor that will put a strain on Brazilian sugar output, is that US ethanol prices will soar with the price of corn, because of the oppressive drought in the US Midwest. US ethanol production without the crutch of generous government subsidies has yet to be proven. This will put further pressure on the Brazilian sugar/ethanol ratio. Both the sugar and ethanol industries will be competing for a larger share of the cane crop.
China is not quite the wild card in the sugar market as it is for other commodity markets. Still, analysts say that consumption growth has not tapered off with the slowdown in its economy. Estimates for both production and consumption can be fairly erratic, but customs data show that imports of 1.4 million tonnes for 2011-12 to date are more than double the previous season’s.
None of the major sugar analysts have changed their forecasts for global production/consumption surpluses for 2011-12 and 2012-13. (The last round of revisions was actually revised to show larger surpluses.) But they will.
The balance of evidence suggests overwhelmingly that the supply/demand fundamentals are bullish. In addition, as we’ve pointed out in previous articles, the cost of production has risen substantially, particularly in Brazil.
The rally has not gone unnoticed. The most recent CFTC data show that fund net-long positions have moved from a small net-short position as recently as mid-June to a net-long position of over 60,000 contracts (Chart 2). Expect volatility.
We recommend maintaining long positions in October sugar. Raise the 19¢-per-pound stop, suggested on June 7, to 22¢, close only.