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Collapse of sugar under weight of surplus

Kunal Bose 

and managers putting their bets in sugar are in the habit of looking for cues from the eponymous founder of Switzerland based consultancy and experts as to how prices of the soft commodity will behave in the days ahead. They mostly benefit by listening to expert views. But in the past sugar year, most investors flipped the coin wrongly, going by highly optimistic surplus forecasts by experts, though revised downward with season’s progress. The factor having most significant bearing on prices is how much surplus or deficit the world will have of sugar in a season and the next. Like while this season to end in September 2012 is having a surplus of eight million tonnes (mt), early forecasts for 2012-13 show excess supply from four mt to eight mt.

Being an agro-based commodity the supply of cane and beet from which sugar is made is decided first by commitment of land to the two crops and then by behaviour of the weather, which keep on changing. Didn’t Kingsman bring his global surplus estimate down from 5.17 mt to 3.52 mt for the 2010-11season in the course of three months. Who could have thought in early parts of this season that bumper harvests in Thailand defying floods, China, Russia and the European Union would create a global surplus of eight mt?

But now China is lifting production by 1.05 mt to 11.5 mt. In a remarkable recovery from early season gloom, Thailand has produced 600,000 tonnes more at 10.24 mt. The bumper beet crop has largely freed Russia from the import pressure for stocks replenishment. Largely bec-ause of sector specific reforms, EU sugar beet production in terms of raw sugar equivalent has leapt from 15.4 mt to 17.2 mt.

At some point, the market had to reckon with the big surplus resulting from bumper harvests in India, expected from the season start and some other places, surprising the observers. To add to the challenge of living with an eight mt surplus, an equally large excess supply is likely to overwhelm the market’s next season. The question may be asked as to why fund managers waited for so late in the season before putting their trades into the bear groove. They had reasons to be cautious after they walked the wrong path last season, listening to the sages at consultancies and banks.

For any commodity, when prices sink below a certain level, speculation starts as to where the new floor will be found. Last week at one point, the July raw sugar contract on New York Intercontinental Exchange (ICE) fell to 18.86 cents per lb, the lowest intra-day price since August 2010. Speculators were found extending their net short positions. In less than a year and a half, the sugar pendulum has swung from one extreme to another.

In February 2011, raws climbed to 35.31 cents per lb, the highest in three decades, as news of damages caused by cyclone in Australia, a leading sugar producer, streamed in.

The global surplus of the magnitude that is being talked about for the current and next year is no doubt the main culprit for price fall. But the commodity market in general is also now contending with a raft of dismal economic news from around the world. Not to talk about the crisis in Euro zone, the emerging economies like China and India have started showing signs of running out of steam, says industry official Raw prices have looked up since, though still a tad lower than the psychologically important 20 cents per lb. This happened on reports that rains in Brazil’s centre-south, accounting for over 90 per cent of cane crop of the world’s largest producer and exporter of sugar, will delay harvest and on a mounting backlog in shipments from its leading ports of Santos and Paranagua. As is the pattern, the Ramadan month to start on July 20 is creating some extra demand and premium but for white sugar. Some benefits have, however, spilled on raws.

In a situation of surplus keeping sugar prices at uneconomic levels for factories, particularly the ones in India denied the advantage of any linkage between cane and sweetener prices, mitigation of some pains can come if the Brazilian industry would start using more cane this time than usual to produce ethanol. This could happen if sugar prices will over a period stay below the ethanol floor price (in industry parlance, it is ethanol parity) to make it worth Brazilian factories while to get intensely focused on making ethanol.

Ethanol parity is subject to change depending on the behaviour of sugar and crude oil prices and also the Brazilian currency real and dollar parity. The importance of currency parity is underlined by Brazil’s mammoth 42 per cent share of world sugar exports. Recent fall in value of real has lifted income from sweetener exports in local currency. At the same time, every fall in oil price will make ethanol a less promising product for Brazilian sugar factories.

In an ideal situation, however, as much as seven mt of Brazilian sugar could be diverted to ethanol making.

First Published: Tue, June 12 2012. 00:30 IST