Sugar fundamentals are lending more support to prices, Rabobank said, as it increased its forecast for this season’s sugar deficit.
Sugar prices had a bumpy start to the year, but Rabobank said the sharp volatility in February “had more to do with technical factors than volatility,” with raw sugar prices now back into the 14-15 cents a pound range seen at the end of 2015.
“The main trigger of volatility in first three months of 2016 appears to have been fund selling, following a bout of general macroeconomic uncertainty associated with concerns about Chinese economic growth and very low oil prices,” Rabobank said.
“Very little changed regarding sugar fundamentals during this period; if anything, they grew slightly more supportive.”
Fundamentals back in the driving seat
And now the fundamentals are starting to drive the market once again.
“In more recent weeks, fundamentals have reasserted their role as the prime driver of prices.”
Rabobank upped its forecast for this season’s sugar defict, the extent to which supply outstrips demand, by 2.1m tonnes to 6.8m tonnes.
“As a result of the projected deficit, by the end of 2015-16, the global stocks-to-consumption ratio is expected to dip very slightly below its ten-year average level, suggesting a return to a more balanced supply/demand position,” Rabobank said.
Ideas of deficit increase
Rabobank is the latest in a series of market players to increase its idea of a sugar defect this year.
Separately on Monday, FO Licht raised it forecast for the world 2015-16 sugar deficit to 7.2m tonnes, up from an earlier forecast of 6.5m tonnes.
Last month the International Sugar Organisation raised its forecast by 1.5m tonnes to 5.0m tonnes.
And Datagro lifted its forecast to 4.37m tonnes, from 3.87m tonnes.
FC Stone in February lifted its forecast to 7.0m tonnes from 5.6m tonnes.
Eyes on Brazil
The 2015-16 crop year in key northern hemisphere producers, such as India and Thailand, runs until late in 2015.
But in Brazil, the world’s biggest sugar exporter, attention is already turning toward the 2016-17 season, which officially starts next month.
Rabobank saw the market pricing a Brazilian 2016-17 sugar crop of 34.0-35.0m tonnes.
But the bank warned there is “much more scope for the eventual outcome to be lower than this current consensus than for it to be higher”.
Upside risk
Possible factors that could influence Brazilian production to the downside could be more of the cane crop being diverted to ethanol, or adverse weather slowing cane processing.
And Brazilian exports could be supressed by a stronger real, lending further support to international pricing.
“In the last week, the Brazilian real has appreciated against the US dollar, partly as a result of the dollar losing some ground generally, and partly as a reaction to the latest twists and turns of the ‘car wash’ corruption scandal,” Rabobank said, referring to a large scale corruption investigation, which some hope will topple the current administration, ushering in a more market-friendly regime.
And commodity prices have also enjoyed a recent bounce, which could support sugar prices if they continue, Rabobank said.
As for factors that could weigh on prices, Rabobank pointed to the possibility of a stalling commodity rally, the rebound of the dollar, and fresh weakness in the Brazilian real.
“While the latest developments signal an increased possibility of political change in Brazil, nothing has changed in terms of the tough and immediate challenges the country faces in bringing the public finances under control, reining in inflation and generating positive economic growth.”
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