Sugar(NYBOT:SBK14) prices have rallied by close to 20% off their late-January lows. Yet a glance at the weekly chart shows a mere blip in a long bear market. The anticipated pre-March-expiry short-covering rally has been true to form, with open interest shedding 50,000 contracts in the last two weeks of February.
Will that be all? Or is this the beginning of a much broader bull run?
The rally was underpinned by some potentially very bullish news. Extremely dry weather conditions for the first six weeks of 2014 in Brazil could wipe out a significant chunk of the 2014-15 crop. The crushing season begins in April. Early forecasts called for a cane crop that would be 10 to 20 million tonnes above 2013-14. With the inclement weather, however, analysts estimate that about 40 million tonnes of cane may have been compromised. Both ethanol and sugar output will suffer. A rough estimate would put sugar production about 2 million tonnes below 2013-14--enough to compromise the comfortable availability of exportable global supplies the market has become ccustomed to over the past few years. If the weather does not improve, the shortfall could be closer to 4 million tonnes.
The 2013-14 marketing year will end in surplus, but the International Sugar Organization (ISO)—as well as analysts at all the major trade houses—have been trimming their estimates during the past couple of months. On Feb. 26, the ISO revised its estimate for the surplus to 3.6 million tonnes, down from its previous estimate of 4.4 million tonnes. According to the ISO, it will be the first time since 2008-09 that sugar production will fall from previous-season levels. Some analysts see the surplus falling to closer to 2 million tonnes.
Cane crops were robust in 2013-14. Now that we are in the crushing stage, the dwindling surplus may be the first indication that low prices are discouraging sugar production.