Sugar prices (NYBOT:SBV13) have bounced off multi-year lows, possibly because of the upcoming expiry of the October contract, a prevalent pattern for expiries over that past year and a half. Developments on the supply/demand front have been mixed.
On the bullish side, although Brazilian cane area was higher than last year, several bouts of unfavorable weather over the past several months have prompted analysts to trim estimates for sugar output by about 2 million tonnes, down to about the same as last year’s. A frost in late July damaged this year’s crops and could have implications for next year’s crop as well.
Aside from the outright loss of output from crops that are unusable for sugar production, sucrose content in partially frost-affected cane is generally lower, which provides a further incentive for processors to bump up the ethanol/sugar ratio, in favor of ethanol. Indeed, one estimate puts the ratio at 57/43 in favor of ethanol, the highest figure we’ve seen in some time.
An excellent Indian crop is developing, however, and that could temper the bullish effect of lower Brazilian production on the market. Like in many countries, falling sugar prices resulted in smaller cane and beet area for the 2013-14 crop. But the annual June-through-September monsoon was very strong this year. Despite the smaller cultivated area, Indian farmers will harvest a bumper crop. The current forecast is 25 million tonnes, compared with 2012-13 output of 24.6 million tonnes, but up sharply from early-season estimates that were as low as 22 million tonnes.
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.