Sugar unlikely to return to sweet spot soon

Investors were carried along in a wave of enthusiasm for the soft commodity, swept away by reports of bad harvests in India and Brazil that would leave a significant shortfall.

It sent prices on the ICE Commodity Exchange in New York surging to a 30-year high at more than 30 cents per pound.

But in February, reports of healthier-than-expected harvests poured cold water over the warnings that too much sugar cane had been damaged by rain in some places and drought in others. Before long, it had caused the positive sentiment around sugar to evaporate and prices to plunge at their fastest rate since the 1980s.

Although there is still an expectation of a deficit of between 9m and 12m tons of sugar production in the 2009-2010 crop year, there could actually be a surplus of a million tons the next year, according to the International Sugar Organisation.

The resulting sugar spike is likely to have raised the blood pressure of soft commodity investors across the globe.

Attracted by the healthy prices for much of last year, cane producers started planting more crops in the hope of cashing in on the bull run. Now the Brazilian Sugarcane Industry Association is forecasting sugar cane output may rise 10pc this season to more than 580m tons.

India's sugar producers have now called for a 60pc import duty on foreign sugar, since exchange prices have dropped lower than domestic prices in India.

Prices fell as low as 16.57 cents per pound at one point on Wednesday on the realisation that worries about the supply were overplayed by the market, and US analysts believe prices could tumble as low as 15 cents per pound.

As prices dropped 8.5pc this week to their nine-month low, signs emerged of a speculative investor sell-off with hedge and index-fund managers dramatically cutting their holdings, according to data from the US Commodity Futures Trading Commission.

Indian, Brazilian, Thai and other top exporters have also blamed the European Union for contributing to the slump in prices this year, after it pressed ahead with exporting more sugar than specified under a trade agreement.

The exporters are planning to lobby against the EU's actions, after the shipment of an extra 500,000 tons on top of the agreed allowance.

Towards the tail end of this week, there were some signs that sugar's fall from grace may have levelled off, with the world's second-largest exporter, Thailand, insisting on a forecast of about 18 cents per pound. Its board of trade pointed out that China and India may still potentially suffer poor harvests and claimed that fundamental demand has not weakened.

"We're pretty close to the bottom," Ian McMaster, chairman of the Global Sugar Alliance, told an industry meeting in Thailand. "I would be surprised to see it fall much further."

Czarnikow, the world's oldest sugar trader, is also convinced that the fundamental structure of the market – with demand outstripping supply – has not changed. And it has warned that the low prices are now cutting into profitability, giving little incentive or funding for further growth and therefore increasing the risk of further volatility.

"Given the collapse of market sentiment it is very difficult to see the immediate path for the market," said Toby Cohen, head of analysis. "In the short term we have to expect to see volatility remain high, and though the market should retrace some of its losses, we cannot yet identify a catalyst to signal a change in direction given the way that the market has ignored recent take-off.

"But despite the rise and fall in prices, little has changed in terms of the fundamental structure. The sugar market remains heavily exposed to a few key suppliers while stock levels remain extremely low."

Others believe the sugar price may have further to fall before it shoots back up again, because the world's biggest consumers of sugar – drinks and confectionery makers – have been reluctant to buy the commodity at such expensive levels, pushing down demand.

"Physical buyers will be waiting on the sidelines in expectation of a continued decline in prices until prices will have stabilised," according to analysts from Commerzbank.

"Even though the price decline is overdone – given that there is still a market deficit – one should wait until the price has bottomed out.

"This should be the case at a price level of between 10 to 15 US cents. This is the price range within which the sugar price is usually fluctuating when the sugar market is balanced."

Whether sugar has further to fall or not, it is looking unlikely that it will return to the sweet spot it hit at the height of the market frenzy any time soon.

source: telegraph