Sugar futures recovered to set a seven-month closing high despite an industry report showed output from Brazil’s main producing region growing a little faster than investors had expected.
The immediate reaction to data from cane industry group Unica, showing that sugar output in Brazil’s key Centre South region revived strongly in the second half of last month, was to pull futures below early highs.
However, the benchmark March 2016 contract recovered to close at 14.01 cents a pound, a gain of 0.2%, and the highest finish for a spot contract since February, amid ideas of rainy weather causing fresh cane harvest setbacks.
“Weather forecasters expect the southern part of south Brazilian cane regions to remain a little on the wet side for the next week or so, which will only support the market’s rally some more,” said Tobin Gorey at Commonwealth Bank of Australia.
Cane vs ethanol
Centre South sugar output hit 2.39m tonnes in the second half of last month, a jump of 46% year on year, Unica data showed..
The figure was also 43% more than produced in the first half of September, when rain delayed cane harvesting, and some 10,000 tonnes more than the figure expected by investors polled by analysis group Platts Kingsman.
The increase was down in the main to a revival in the speed of the cane harvest, with drier weather allowing mills to process 40.5m tonnes of crop, compared with 29.6m tonnes in the first half of the month, a gain of 37%.
However mills also directed more cane – 42.5% of the crop – than in the previous fortnight to making the sweetener rather than ethanol.
Ethanol output during the latest period, at 1.99m litres, was a little below market expectations.
The swing towards sugar tallies with an observation from research institute Cepea on Wednesday that there is a 21% advantage in mills’ returns from making the sweetener from cane, rather than ethanol.
Sugar prices rose last month by 15.5% in Sao Paulo to exceed year-ago levels for the first time this season, Cepea said, while noting strong growth in ethanol values too.
Region of two halves
The acceleration in the cane harvest took volumes ahead of last season’s, on a cumulative basis, by nearly 3m tonnes, although Unica forecast nonetheless a “delayed completion” of the grind this season, given a concentration of delays in the key state of Sao Paulo.
The Sao Paulo cane harvest is running 4% behind year-ago levels, compared with the 9% advance in other Centre South areas.
On Tuesday, Australian analysis group Green Pool forecast that while Centre South mills would have some 620m tonnes of cane available to harvest in 2015-16, only some 595m tonnes would actually be reaped.
Often some so-called “carryover cane” is left standing in fields when the harvesting period ends, as rains ramp up around the end of year, but is processed early in the next season.
Commerzbank caution
Thursday’s price gain takes to some 21% the rally in New York’s March 2016 sugar contract in a little over two weeks, with dryness in India, besides the early-September harvest delays in Brazil, also seen as fuelling gains.
Headway has been supercharged by a round of short-covering by hedge funds, which have been net short in the sweetener for most of the past year.
They turned net long in the week to September 29 with the biggest swing bullish in positioning in 14 months.
Commerzbank cautioned that profit-taking on long positions could now make further price gains more difficult to achieve.
“We would warn against assuming that the sharp increase in prices seen in recent weeks will continue, as we would not be surprised to see profit-taking,” the bank said.
“One possible trigger could be a renewed depreciation of the Brazilian real amid political turmoil in Brazil, as President Dilma Rousseff faces the threat of impeachment.”
A weaker real cuts the value, in dollar terms, of assets in which Brazil is a major player.
‘Another surge?’
However, at Commonwealth Bank of Australia, Tobin Gorey flagged the potential for technical support to March futures, if they can surmount their 200-day moving average, which stands at 14.15 cents a pound.
The contract has not touched its 200-day moving average for more than a year.
“There is the potential for yet another surge if prices rise through that moving average,” Mr Gorey said.
