Have we met the sugar bear?

Focus on Futures: Sugar

Unfavorable weather conditions in June and part of July in the world’s two largest sugar producers – Brazil and India – threatened to compromise 2012-13 production. In Brazil, excessive rains hampered the harvest and lowered sucrose content. In India, the monsoon season got off to a slow start, leaving cane crops with insufficient moisture. Prices responded accordingly, with a strong rally up to 24¢ per pound.

Improved weather in both countries, however, stabilized the situation, ending fears of a global deficit. In Brazil, drier weather prevailed, allowing the harvest to advance. The Indian monsoon picked up some steam, and a disaster was avoided. The market has since erased the entire rally.

The rally was an accurate reflection of bullish supply-side fundamentals. Had the weather not cooperated, we would be looking at crop losses of several million tonnes in each of the two countries. The resulting global production/consumption deficit would have drawn stocks down enough to tighten supplies available for world trade. Conversely, the selloff back below the 20¢-per-bushel level has, we believe, been exaggerated to a degree.

To be sure, there were enough bearish developments on both the supply and demand sides to warrant the downdraft. The seasonal demand period in the Middle East and Asia had ended. As recently as July, Chinese customs data showed large increases in sugar imports, which seemed to indicate strong demand down the road. Now, analysts are saying that 2012-13 imports will fall to 2 million tonnes, down from 3.5 million tonnes in 2011-12.

Finally, the sugar/ethanol ratio in Brazil has been favoring sugar. Even with falling sugar prices, sugar provides a higher profit margin. Recent estimates say that 48.7% of the cane crop was used for sugar, up from 47.1% in the 2011-12 season.

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