Sugar futures set for sharp move - but which way?

by Agrimoney.com

Sugar futures are at a tipping point, which could see them fall some 15% or soar 30%, Phillip Futures said.

But as to which way they will break, commentators stressed divergent price influences.

Phillip Futures flagged "clear signs of tapering momentum" in the sugar market, with "smaller movement on the price chart" and lows on the chart for the sweetener's moving average convergence-divergence measure, a key technical indicator, "converging to zero".

Such phenomena often precede large price moves.

But as to which way, "there seems equal change of sugar breaking on the upside and the downside", the Singapore-based broker said.

New York futures, trading at 16.99 cents a pound in New York on Friday for the best-traded October lot, could break as high as 21.7 cents a pound or fall to 14 cents a pound.

"Fundamentally sugar is in large excess, but an unlikely major switch to ethanol production may cause unexpected disruption in sugar," the broker said, a reference to mills' capability, notably in Brazil, to convert cane into either the sweetener or the biofuel.

'Bullish view'

Separately, Rabobank, while cautious over predicting much move in sugar prices for now, said it was sticking by a "bullish view on the sugar market over the medium term", seeing futures recover to average 19.0 cents a pound in the last three months of 2013.

The price level at which it makes more sense for Brazilian mills to convert cane into ethanol rather than sugar "is becoming increasingly supportive" to sugar prices, "with ethanol production absorbing a greater proportion of the cane harvest", the bank said.

Recent rain delays to the cane harvest in Brazil's key Centre South region "raise the question of whether it will be possible to harvest the entirety of the 585m-tonne Brazilian cane crop this season".

Furthermore, the global sugar production surplus in 2013-14, which Rabobank pegged at 3.77m tonnes, would be the "smallest in three seasons".

'Surpluses have not disappeared'

However, Kingsman, the respected sugar consultancy, signalled a more cautious approach, even as it confirmed a downgrade to 3.927m tonnes, from 4.591m tonnes, in its forecast for the world sugar output surplus in 2013-14.

A drop in the surplus from the 11.486m tonnes estimated for 2012-13 "is being portrayed by some as bullish", the Swiss-based group said.

"But although it is a step in the right direction a surplus is still a surplus.

"And the past surpluses have not disappeared - the excess sugar is sitting in warehouses in China, India, Mexico and Argentina, to name but a few."

India uptick

Furthermore, it highlighted, generally, "upside" risks to its sugar output forecasts, for countries including Thailand, Pakistan and India, the second-ranked producing country, where a strong monsoon is seen as helping cane in many areas recover from drought, if causing flooding to some crops.

"Our Indian production estimate of 22.3m tonnes white value (24.2m tonnes raw value) has potential upside, with some now talking the crop closer to 23m-24m tonnes white value," Kingsman said.

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