The fading sugar surplus

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.

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