The sugar bear had a brief respite this past fall when poor harvest weather in Brazil threatened the quality and quantity of the crop. After trading down to multi-year lows in early September, prices rallied 10% through mid-October. Weather conditions improved, and prices came right back down to test the 19¢-per-pound level. Several months ago weather conditions were so poor that analysts put the Brazilian crop – and by extension exports – significantly behind the previous year. Now that the harvest of the Center-South region is complete, crop and export estimates are actually ahead of the 2011-12 season.
Most other output developments have been to the bullish side, though.
Still in Brazil, 90% of the crop is grown in the South Center. The balance is grown in the north, and those regions experienced extreme drought during the growing season. In some areas, as much as 30% of the crop was lost. On average, the losses are expected to be up to 15% of output for the region, or 1.5% of total Brazilian output. It’s not an overwhelming amount, but enough to mitigate some of the effect of the extraordinary recovery of the South Center.
The 2012-13 Indian crop suffered from a below average monsoon. As we guessed in previous articles on sugar (see Focus on Futures, August 31), estimates that put this year’s output on par with the previous year’s results of 26 million tonnes were impossible to achieve. Indeed, current estimates have fallen to as low as 23 million tonnes, which is dangerously close to domestic consumption levels. That would cast some doubt on the wisdom of the liberalized export policy. Ending stocks for the recently completed 2011-12 marketing year will be about 6 million tonnes, which is adequate, but makes it imperative for the coming 2013-14 crop to have a proper monsoon season.
Thailand had record output for two consecutive years of about 10 million tonnes in 2010-11 and 2011-12. It was a sudden jump of about 40% over the average of 7 million tonnes that the country had produced in previous years. The pattern was expected to continue into 2012-13, but precipitation was insufficient and as a result, output will be close to 1 million tonnes below early season forecasts. Thai exports will still be over 7 million tonnes, but about 1 million tonnes less than in 2011-12.
Several years ago, as much as 65% of all cane grown in Brazil was dedicated to ethanol production. As sugar prices exploded towards 30¢ per pound and beyond, profitability shifted towards sugar production. At present only 51% of the crop is being turned into ethanol. That is sure to change.
First, the government is expected to raise the minimum ethanol-to-petroleum ratio from the 20% to 25% range sometime in the new year. More importantly, though, the end of the ethanol-subsidy era in the U.S. and a disastrous U.S. corn crop this past summer have sparked a wave of U.S. imports of Brazilian ethanol.
Several months ago, 2012-13 Brazilian ethanol exports were estimated at 2.2 billion liters, up from 1.9 billion in 2011-12. Roughly 75% of exports are destined for the US, but that ratio is likely to grow. The export estimate is being revised upwards, with some analysts putting the figure at 2.55 billion liters. And there is ample evidence that these estimates are conservative. September exports were 452 million liters, up from 174 million liters a year earlier. In October exports reached 492 millions liters, compared with 247 million liters in October 2011. Expect these developments to tighten up Brazilian ethanol supplies and to accommodate a considerably higher ethanol-to-sugar output ratio.
On Nov. 15 The International Sugar Organization raised its estimate for the 2012-13 global sugar surplus to 6.18 million tonnes, up from a previous forecast of 5.86 million tonnes. While we can’t disagree with this forecast under current conditions, we believe that Brazilian sugar supplies – the single most important fundamental for the global sugar market – will not be as plentiful heading into the coming months.
We’ve struggled with a long position in sugar, which we view as still being a long, drawn out bull market. Maintain the 18.5¢-per-per pound stop, basis the nearest contract, we recommended on Aug. 31.