The fading sugar surplus

Based on the early-season production estimates and domestic consumption of about 23 million tonnes, we believed that Indian exports would not be a factor in world trade. The optimistic outlook for the coming crop has changed that, and some analysts are now saying that India can export 3 million tonnes in the 2013-14 marketing year, which if realized, would certainly be a bearish factor.

With full knowledge of the balance between lower-than-expected output from Brazil and higher-than-expected output from India, sugar analysts have continued to lower their estimates for the production/consumption surplus for 2013-14. For 2012-13, the global balance sheet showed a cumbersome 10-million-tonne surplus. Early season forecasts for the 2013-14 global balance sheet called for a 6- to 7-million-tonne surplus, down from a 2012-13 surplus of 10 million tonnes, but have moved down steadily.

The fall in Brazilian output and the uptick in Indian production seem to cancel each other out, but the expectation of rising consumption patterns in developing countries has been significant. For example, Indonesian consumption is forecast to climb by more than 10% from last year, an increase of more than 500,000 tonnes, a substantial amount, particularly when considering that the country is a net importer.

Estimates for the 2013-14 balance have now fallen to a surplus of about 2 million tonnes. Still a surplus, yes, but the market has been tightening. A quote from a Sept. 5 report of an analyst at sugar statistician Czarnikow put it best: “The strength of the physical market is telling us that the supply side of the market, rather than being challenged to find demand, is actually challenged to meet demand.”

The current spring off the bottom in prices may indeed prove to be yet another pre-expiry short-covering event. However, with prices where they are now, the incentive not to plant sugar is still prominent. The good fortune of a fantastic monsoon to produce a great crop from lower plantings will not necessarily repeat. We maintain our strategy of buying long-term out-of-the-money call options.

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