Will sugar market's uncanny echo of 2010 continue?

by Agrimoney.com

Is the sugar market going back to the future?

The resemblance between prices this year and last is striking. New York futures in early February set a record high of 36.08 cents a pound nearly to the day when they set a high last year.

And, on both occasions, the peak has been followed by a rapid decline - albeit last year's, at approaching 60% peak to trough, proving nearly twice as large as the correction suffered this year.

"The market is wary that the current sell-off could continue to mimic the 2010 experience," Luke Mathews at Commonwealth Bank of Australia said.

In which case a sustained rebound in prices, starting early next month, would be on the cards.

Canaplan vs Unica

Such fears have gained been given increasing credence by renewed worries about Brazil, the top sugar producer and exporter.

Analysis group Canaplan estimated the crush from Brazil's Center South region, the main producing area, at 541m tonnes – 28m tonnes less than the figure from industry association Unica.

Canaplan estimated the region's sugar output at 32.1m tonnes, 2.5m tonnes below the Unica figure.

"This has caused market participants to question previous assumptions about sugar availability this season in the Center South," Nick Penney at Sucden Financial said.

'Logistical jams'

Concerns have also re-emerged that buyers may be forced to run the gauntlet of limited port facilities that hampered shipments last year.

Attache estimates for Brazil sugar, 2011-12 and (year-on year change) Cane production: 631.0m tonnes, (+2.1%) Sugar-ethanol split: 46.6%-53.4%, (45.95%-54.05%) Sugar production: 39.6m tonnes, (+3.8%) Sugar exports: 27.3m tonnes, (+6.4%) Domestic use: 12.55m tonnes, (+4.6%) Ending stocks: -585,000 tonnes

Mr Penney clocked "fears that an expected large line up of vessels will materialise at the beginning of the crush season - similar to that experienced last year - and a lack of sugar at port terminals causing logistical jams".

And, after all, US Department of Agriculture attaches overnight estimated the rise in Brazilian exports at 6% in 2011-12, half the rate of increase the country has enjoyed so far in the 2000s, citing an ageing and less productive cane crop and growing domestic consumption.

Furthermore, mills are coming under increasing pressure to direct cane at ethanol, and keep domestic fuel prices in check, rather than manufacture sugar, and solve (albeit at a profit) importers' problems.

This was already evident in a revived premium in New York's July lot over the sugar for October delivery, Mr Penney said. In midday deals, the premium had recovered to 0.24 cents a pound, from 0.06 cents a pound at last night's close.

'Historically elevated'

Mr Mathews noted another bullish signal. "The recent improvement in the [London] white sugar-[New York] raw sugar futures spread indicates that physical demand may enter the market at these levels."

Indeed, he forecast that the correction this time would not prove "as severe" as last year's.

"The downside risks to Brazilian sugar production, and therefore exports, suggest that global sugar prices should remain historically elevated over the coming six-to-12 months," he said, adding that the likelihood of Chinese buyers stepping in looked set to limit price falls too.

'Downside risks'

However, nor did he foresee prices bouncing as hard as they did last year, forecasting New York sugar ending the year at 23.20 cents a pound.

It ended last year at 32 cents a pound.

And in 2011-12, the world looks like having more sizeable exports from India, the second-biggest producer, to count on with USDA attaches pegging the increase in shipments at 1m tonnes, to 1.8m tonnes, with output boosted by the impetus that higher prices have given to cane planting.

"The downside risks are mounting," Mr Mathews said.

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