Sugar price dive tipped to reverse

THE New York May 2010 sugar futures price fall from a high of US30c/lb in late February to US17c/lb at the end of March took most in the industry by surprise, including the economists at the Commonwealth Bank who in a report posed the question - what's next?

"It's not that we weren't expecting prices to decline, it's just we weren't expecting a near 40 per cent slump in 30 sessions," the report began.

Several factors combined to cause the slide - higher production in response to the extremely high prices and demand rationing, with anecdotal evidence suggesting demand dried up at prices beyond US25c/lb.

Several tenders by Pakistan, Egypt, Philippines, India and Indonesia to import sugar were scrapped during January and February with high prices cited as the primary reason.

The slump in prices resulted in several notable buyers (including India) reportedly walking away from import agreements and seeking to renegotiate supplies on more favourable terms.

India's 09/10 sugar production forecasts have been raised from 15 million tonnes to as much as 17mt, meaning 1-2mt of imports will no longer be needed.

The Brazilians continued to crush cane during the wet season, adding to global supply during the off peak period and as March approached the market began to focus on the upcoming Brazilian centre south region harvest, with 40 per cent of its mills expected to be operating by now, is far more than usual and that is expected to result in record sugar production. Also centre- south cane production is forecast to rise 10pc to 580mt in 2010/11.

However those fundamentals alone cannot explain a 40pc slide in 30 sessions. Sentiment among market participants plummeted, with many players running to the door 'at any cost' and in the past month alone interest in raw sugar by speculators slumped more than 31pc - which is why the CAB considers a possible bounce is looming.

In our opinion the market is very susceptible to a sharp upward correction. The simple reason is a huge supply deficit still exists with the International Sugar Organisation putting it at 9.4mt, which follows the 2008/09 deficit of 11.3mt. Combined, they were the two largest deficits on record. The result is that come September the market will face one of the tightest stock-to-use ratio's on record. Thailand is the second largest exporter behind Brazi and the Thai sugar production estimate has been cut from 7.6mt last August to 7mt.

There are still production concerns in other parts of the world. China's sugar production in 2010 is likely to be 11pc below 2009 due to drought in south west cane regions. This could cause a rundown in China's strategic sugar reserves and/or continued reliance on imported supplies for the world's second biggest sugar consumer.

China's sugar consumption has expanded at an average annual rate of more than 5pc over the past 50 years and could approach 20mt by 2015, causing a significant increase in Chinese imports over the medium term so it is no coincidence Chinese companies are seeking investment in global sugar assets (i.e. Bright Foods interest in CSR's sugar business).

source: nqr.farmonline