Sugar futures rebounded from six-year lows, even amid warnings that market gloom is not over yet, with weakness in the Brazilian real seen likely to “provide little respite” for prices.
Raw sugar futures for October, which closed the last session at the lowest for a spot contract since late 2008, soared 2.4% to 10.96 cents a pound in early deals in New York on Friday.
London white sugar for October gained 1.5% to $348.80 a tonne.
However, many commentators expressed doubts that the gains represented more than a pause in a market decline which has taken New York futures down 25% so far this year.
“This looks to me like end-of-week profit-taking on short positions,” a London analyst told Agrimoney.com.
There was some talk, the analyst added, that official data due later on hedge fund positions will show a large expansion in the net short in raw sugar futures and options.
“If people think the short has got too crowded, that could spur some upward pressure on prices as the short is reduced.”
Sucden Financial said that “we assume that the funds and speculators have added to the net short position as of Tuesday and are expecting a combined net short of some 90,000 lots”.
Brazil’s problems
And, at Australia & New Zealand Bank, senior agricultural strategist Paul Deane flagged the prospect of continued pressure on sugar prices from the Brazilian real, which has set a series of 12-year lows against the dollar amid concerns over the South American country’s economy.
The latest low was on Thursday, after Brazil’s congress voted to raise the salaries of some key state workers, such as state prosecutors and police chiefs, by up to 59%, at a cost of R$2.5bn, at a time when the government is attempting to curb the country’s runaway spending.
The Brazilian planning ministry said after the vote that “the proposed readjustments… are incompatible with the capacity of the budget of the Brazilian state and place in risk its fiscal stability”.
Investors’ faith in Brazil is also being undermined by a corruption investigation into state-owned oil Petrobas, a probe which has drawn in several senior current and former politicians.
‘Extremely cheap’
Mr Deane said that, from a fundamental perspective, prospects for sugar prices “are improving”, with the sweetener “looking undervalued on a medium-term view.
In Asia, it appears “extremely cheap against starch-based sweeteners”, a fact reflected in continued strong Chinese imports of raw sugar.
In Brazil, sugar looks “undervalued” compared with ethanol, an important factor given that many mills can chose whether to produce either the sweetener or the biofuel from cane.
“However, the sugar market has look this way for some time against such metrics… [and] will continue to fail to attract any premium for improving fundamentals until the Brazilian real can stabilise,” Mr Deane said.
With perceptions that a bottom for the real “is still a while away… Brazil’s currency is likely to win out again, and provide little respite for sugar prices over the quarter ahead”.
‘May even fall to lower levels’
Separately, Tobin Gorey at Commonwealth Bank of Australia said the point was “probably close” when mills in Brazil’s key Centre South region would “prefer to produce ethanol instead of sugar”.
However, in practice, “we suspect that prices ‘undershooting’ the ethanol leak point are not only possible but are highly likely”, given a lag that is likely to occur before a switch by mills prompts any buying in sugar futures.
Earlier this week, the International Sugar Organization said that “a potential sharp drop of Centre South [sugar] production in Brazil in the current 2015-16 crushing season due to a heavy focus on ethanol… would usually provide some bullish arguments.
“But this is currently overshadowed by the renewed weakening, if not to say collapse, of the Brazilian real.
“If that were to continue world sugar futures may even fall to lower levels than the already depressed ones currently in place.”
A weak real cuts the values, in dollar terms, of assets such as sugar in which Brazil is a major player.
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