Sugar futures rose in 2015 for the first time in four years.
The recovery was not plain sailing. Prices in August touched 10.13 cents a pound, the lowest for seven years, undermined in part by the continued pressure from successive years of world production surplus. El Nino-induced weather setbacks, besides weak price incentives, have undermined output.
The depreciation in the Brazilian real also played a big role, cutting the value of assets such as sugar in which the South American country is a major player.
However, the stabilisation in the currency, coupled with the prospect of a return to world production shortfall in 2015-16, has seen futures recover markedly, to number as one of the few commodities to end 2015 higher than it started.
But has this revival now factored in the tightening supply and demand balance? Will further declines in the Brazilian real upset the recovery?
ABN Amro
“Besides short-term factors, the fundamentals are also pointing to a prolonged period of higher prices.
“After five years of surpluses, global sugar output looks set to produce a shortfall in the coming season. The International Sugar Organisation’s latest projections show contraction of 1.15% year-on-year, working out at 169m tonnes.
“This fall in production is expected to coincide with a 2.2% jump in global sugar consumption to over 172.9m tonnes, bringing the shortage to an estimated 3.5m tonnes.
“However, continuing high stock levels alongside the current global export/import balance are likely to curtail the extent of this increase.
“The biggest upward price risk is a strong El Niño, which could adversely affect production and cause further shortages.”
Commerzbank
“The prospect of deficits was probably a major contributor to the surge in prices this autumn.
“Market players taking a short-term view have certainly been unsettled. They have shifted their net short positions prevailing for over a year to net long, and in recent weeks have been holding the largest net long positions since summer 2014.
“Even though prices have undergone something of a correction to the 50% gains made from mid- August to early November, we still do not envisage a retreat in the near future to anywhere close to the seven-year August low of just over 10 cents per pound.
“On the contrary, they should settle at a higher level. Strong demand for ethanol in Brazil, prompted by a higher admixture requirement and higher gasoline prices, is also a support for sugar prices. More ethanol and correspondingly less sugar will be produced.
“However, the real -dollar exchange rate remains a risk factor as the autumn price rise was probably only possible against a background of the Brazilian currency not losing any additional value.
“Our foreign exchange analysts forecast a further significant depreciation of the real in 2016.”
Goldman Sachs
“Prices have rallied strongly since sugar reached a seven-year low of 10.5 cent a pound in late August.
“The key drivers behind this rally have been dryness in Brazil’s Centre South sugarcane belt and a rapid rise in domestic ethanol prices. Ethanol prices remain elevated, so despite a strong harvest, a smaller share of cane has been converted into sugar.
“In Thailand, El Niño induced drought has led to a delayed start to the harvest.
“Unfavourable weather and the risk of more to come, thanks to El Niño conditions, point to the global sugar market entering deficit this year.
“Against this, the larger Indian exports and renewed Brazilian real weakness -our economists see the real at 4.30 to $1 in 12 months – suggests a better supplied market and lower dollar prices, particularly in the next crop year.”
J Ganes Consulting
“For the sugar market the focus should not be on production but rather where is the buying going to come from?
“For starters, East European imports are expected to decline for the second season and are now estimated at 3.2m tonnes, down from 3.663m tonnes in 2013-14 and 3.422m tonnes in 2014-15.
“For the current season Chinese imports may back off from the levels taken in 2014-15 with purchases expected to dip to 4.575m tonnes from 4.8m tonnes before.
“The sugar market operates as a residual market and it is paramount for a sustained bull market to have increased import needs beyond what is normally conducted.
“Without this key element, it is difficult for the sugar market to sustain gains. Lower production prospects need to spur increased import needs or the tightness won’t be felt by the market.
“With stocks high in consumer and producer countries, it remains to be seen where the next large buying spree emanates from.”
Morgan Stanley
“After more than a year of low prices, a shrinking global surplus, coupled with limited reinvestment in cane plantings, should conspire to lift prices year on year in 2015-16.
“In Brazil, above-normal rain and limited reinvestment in cane fields have lowered the cumulative ATR, the amount of sugar produced per unit of cane crushed, to the lowest in at least six years.
“Falling sugar prices and increased gasoline taxes have lifted Brazilian hydrous demand to record levels, pulling more of the cane crush away from sugar and toward ethanol production. The sugar mix should fall to the lowest since 2008.
“Chinese import demand has exceeded expectations over the past year, as falling prices have led to sharp production declines. China’s debate on the future of its minimum support price policies should shape import demand in the long term.”
Rabobank
“World sugar market fundamentals are arguably more bullish than most of the other agri commodities heading into 2016, with heightened weather risks in play.
Forecasts for quarter average, spot Chicago futures contract
“The recovery in [raw sugar futures] is expected to continue through 2016. Heightened price volatility can be expected, as the world supply-demand balance transitions into the first production deficit in six seasons.
“After trading below the cost of production in leading producer countries for the last 2.5 years, investment across the sector has declined, and cane and beet area have contracted.
“A production response to the recent upward correction in prices is not expected until the 2016-17 season, led by the European Union and China. Deficit balances are expected to be the new norm over the coming years.
“However, the drawdown on near-record-large world stocks will take some time, and higher prices weigh on demand.”
Societe Generale
“While we continue to see some additional downside risk to the real in the short term, with the recent rally and our expectations of another in the first half of 2016, it appears that the worst is over. As such, we expect currency-related downside risk to sugar prices to continue abating.
“Turning to the supply and demand balance, lower production estimates in Brazil, India, and Thailand have led us to increase our projected 2015-16 deficit from 1.26m tonnes, raw value to 2.31m tonnes, although this was partially offset by a slight reduction in expected global consumption.
“Going forward, we expect a longer than normal tail to the current Brazilian sugar harvest but also see a considerable amount of cane to be left over for the next harvest.
“Economically speaking, Indian domestic prices currently offer little incentive for mills to export sugar. Seasonally, as the harvest begins, prices trend lower, as new sugar is available to the Indian domestic market, which could help open the Indian sugar market to exports.
“Weighing the various factors affecting sugar, we are now neutral to the curve.”
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