Sugar: India joins Brazil with a compromised crop

Focus on Futures: Sugar

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.

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