Sugar Price Heads to 28-Year High on India Imports as Crop Plunges

Sugar prices may reach a 28-year high as a plunge in India’s harvest creates a global production deficit.

Raw sugar jumped 30 percent this year, in the biggest rally since 2005, and rose to 15.41 cents a pound on ICE Futures U.S. in New York yesterday, the highest level since July 2006. Michael McDougall, a senior vice president at Newedge USA LLC, said prices may gain another 30 percent in the last quarter of 2009 and the first quarter of next year to as much as 20 cents, the highest since 1981.

India, the largest consumer, will boost imports 33 percent to 4 million metric tons in the year through September 2010 as consumers buy more soft drinks and processed foods, according to Kingsman SA, a sugar broker and researcher. The International Sugar Organization said yesterday the deficit will reach 7.8 million tons this year, the most in more than a decade and higher than a February forecast of 4.3 million tons.

“The deficit is still ahead of us,” said James Cassidy, the head sugar trader at Newedge in New York. “We are not expecting anywhere near a sufficient recovery in Indian production.”

While Brazil, the largest grower, forecasts a 20 percent bigger harvest this year, Kingsman said sweetener output won’t be enough to meet world demand. The gap may narrow to 4.9 million tons in the year that begins in October, according to a preliminary estimate, Sergey Gudoshnikov, an ISO senior economist, said during an interview yesterday in New York.

Output Deficit

The last time global consumption topped output for two years straight was during the three seasons ended in September 2006, the London-based International Sugar Organization said. In February 2006, sugar futures jumped to a 24-year high of 19.73 cents a pound.

India produced less cane after the government raised the minimum price for competing crops such as wheat in a bid to encourage enough grain output to meet domestic demand, said commodity researcher Czarnikow Group Ltd. Farmers also were encouraged to switch as cash-strapped sugar mills delayed or withheld payments for supplies, Czarnikow said. India became a net importer for the first time since 2006.

“For six to 12 months, India is going to support the market,” said Nicholas Snowdon, an analyst for Barclays Capital in London. “India has a far more influential role in the international sugar market than it has for the previous two harvesting years.”

‘Gradual Increase’

Jeff Bauml, an analyst for R.J. O’Brien & Associates in New York who accurately predicted sugar’s decline to 11 cents in November, said he now expects prices to reach 18 cents to 19 cents by the end of the year.

“It’s going to be a gradual increase,” Bauml said in an interview from New York. “Most of it will be backed on India.”

Jonathan Kingsman, who heads a Lausanne, Switzerland-based sugar researcher that bears his name, said that India’s output may rise as high as 20 million tons next year from 14.7 million to 15 million tons this year. That still won’t be enough to meet domestic demand of 23 million tons.

Mark Hansen, a director at the CPM Group in New York, said the rally may soon end and prices may average 11 cents in six months. “Indian production can rebound,” he said.

With prices above 15 cents a pound, “India is not going to buy,” said Samir Somaiya, the president of the Indian Sugar Mills Association. Sugar would need to drop below 13 cents to spur purchases, he said at an interview in New York.

Overly Bullish

Imports won’t be as high as analysts expect because production will rebound, said Narendra Murkumbi, managing director of Shree Renuka Sugars Ltd., a Mumbai-based processor.

“Speculative money is driving the market and overly bullish sentiment about India,” Murkumbi said by telephone from New York. India’s production may rise to 21 million tons in the next crop year from 15.25 million this year, he said.

In Brazil, slumping demand for fuel during the recession is reducing the appeal of crop-based ethanol and forcing refiners to shift more of the nation’s sugar cane to make sweetener.

Brazil will boost its sugar output as much as 20 percent to a record 37.9 million tons in the current harvest, according to the agricultural ministry’s crop forecasting agency. About 45 percent of the cane harvest will be refined into sugar this year, up from 42 percent in 2008, the government said. The industry is being hurt by rising debt and a lack of credit curbing investment in new mills.

‘Prices Remaining Strong’

The prospect of more sugar from Brazil hasn’t been enough to dim the potential for increased demand from India. The South Asian country will import 2 million tons of Brazil’s increased output, said Marcos Jank, the president of the Center South Sugar and Ethanol Industry Association in Sao Paulo.

“We see prices remaining strong,” rising as high as 16.5 cents in the next two to three months, said Plinio Nastari, the head of Datagro, a sugar researcher based in Sao Paulo. “The additional sugar will not be able to solve the deficit. Other countries will not likely add to Brazil’s efforts.”

source: bloomberg