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.