Sugar futures, which soared more than 3% in the last session, eased on Thursday amid some doubts over the ability of the bullish factors such as Brazilian rains to extend the rally, given an overhang of large global supplies.
The rally in sugar prices in the last session was seen as being spurred by Brazilian factors, with heavy rains seen as stalling the cane harvest in Brazil’s Centre South so far this month, even as data from industry group Unica showed output falling below expectations last month.
Mills in the Centre South, responsible for some 90% of Brazil’s sugar output, produced 2.84m tonnes in the second half of August – down 6.0% year on year, and well below the 3.0m tonnes expected by investors, according to a Platts Kingsman survey.
Unica attributed the weak result to mills diverting an unexpectedly large portion of cane to making ethanol, rather than sugar, a trend the group said indicates that the “migration” to the biofuel this season “be higher than expected earlier this year”.
Worst is over?
Earlier, sugar house ED&F Man had flagged support to prices too from drought in Maharashtra, India’s top sugar-producing state, where the weak monsoon rains could see output drop by some 1.5-2.0m tonnes, curtailing domestic production to 26m tonnes.
And the futures markets – in showing an increased premium of white sugar over raw sugar, and a reduced discount of spot October raw sugar futures to the March 2016 contract, both seen signs of less heavy short-term supplies – “are leading to increased speculation that the worst is over” for prices.
“A growing number of estimates are suggesting tighter markets in 2015-16,” London-based ED&F Man said.
“While we are definitely not expecting a shortage of sugar in the immediate term, we do have sympathy with the view that a lot of the bearish news has now been priced in.”
‘Job cut out’
However, some other commentators cautioned over the potential for the sugar rally continuing, with Nick Penney, senior trader at Sucden Financial, saying that “we are not yet convinced that sugar has turned the corner”.
“We are not yet hearing anything on actual increase in demand, ie increased offtake, to reduce available stocks, which are currently estimated at around 47.9% of consumption,” Mr Penney said.
He also underlined doubts over whether Brazil will increase its so-called CIDE tax which, in increasing prices of conventional fuel, would be seen as a positive to ethanol prices.
“With major opposition within Congress to tax increases, the finance minister [Joaquim Levy ]has his job cut out to get it through.”
‘Vast oversupply’
Veteran soft commodities analyst Judith Ganes-Chase also took a less optimistic view, despite terming China potentially a “saviour” for the market in importing more sugar than initially expected, thanks to disappointing domestic output.
While commentators are foreseeing a world sugar production deficit of some 2.5m tonnes in 2015-16, this would be “too small a shortfall to give the market sufficient ammunition to climb,” Ms Ganes-Chase said, noting a “vast oversupply” of the sweetener from successive seasons of production surplus.
“It may keep the market from sinking but still isn’t justification enough for a bull move.”
Raw sugar futures for October stood 0.5% lower at 11.57 cents a pound in morning deals in New York.
