Sugar, the sweetener king, often trades on a sour note. The ‘problem’ is often attributed to surplus. But crude oil and sugar prices are related in a twist of developments. It is highly likely that sugar prices can go up as crude breaks the charts.

The reason is that, when crude oil prices go up, ethanol demand also heats up in the planet. Ethanol can be produced by fermenting the juice that is produced by crushing sugar-cane. Once can also crystallise the sugar cane juice to produce sugar.

But here lies the incentive:

“Currently, the industry in Brazil is finding it much more profitable to produce ethanol over sugar, with realisations of around 2,381.5 real or $ 1,470 on every cubic metre (kilo-litre) sold domestically.” --writes Harish Damodaran in an analysis in The Hindu.

Brazil is the biggest producer of sugar in the world.

In Brazil, sugar output forecast to the tune of 34.6 million tons may be missed.

For the April-March 2010-11 period, around 55% of cane crushed was used for ethanol production. In the new season, a whopping 65% of the cane crushed has been diverted to ethanol production.

In the past two weeks, global sugar prices plunged almost one-fifth attributed to Thailand’s production surplus of 2.6 million tons pegging the output at 9.8 million tons when compared to last year’s (2009-10; October-September) 7.2 million tons.

However it would be simplistic to assume that the sugar prices would continue to stay low:

“India sugar futures on Monday witnessed corrections on profit selling on early gains for the day. Steady spot market activity due to increased supply resulted in the fall at futures. However, overall positive trend is still intact.” said a report from Karvy Comtrade Tuesday.

If this be the case in India, where domestic surplus is failing to keep sugar trading on a depressed note, global scenario cannot be different.

There are also reports that China is scouting for sugar as domestic demand surge.

In the year ending September 30, 2011, China’s output may rise to 12 million tons from the present 11.3 million tons, says USDA. But consumption in China would be to the tune of 13.6 million tons as per revised estimates.

This would cause imports by China—the second biggest consumer of sugar after India—to jump 35%, said a Bloomberg report citing Australia and New Zealand Banking Group Ltd.

According to expert estimates, Chinese reserves of sugar are close to exhaustion. China is expected to source sugar from Thailand and Brazil for about 25 cents a pound(inclusive of an import tariff of 50 percent).

India’s output of sugar—second biggest in the world-- has jumped by 25% to touch22.6 million tons in the first seven months of sugar season which marked its beginning in October 2010, said a recent report in the Bsuiness Standard citing Indian Sugar Mills Association (ISMA) Director General Abinash Verma.

The surplus is attributed to good monsoons of the previous year.

Sugar production in Maharashtra, India’s biggest sugar producing state jumped to 8.3 million tons for the period ending April in comparison to 6.77 million tons for the same period last year.

Sugar production in Uttar Paradesh that closely trails Maharashtra climbed to to 5.9 million tons from 5.17 million tons. Kanataka too witnessed a jump in output from from 2.4 million tons to 3.45 million tons.

For the season ending 2011, ISMA projects India’s sugar output at 25 million tons. Government estimates show that the output may be at 24.5 million tons.

Last year, the output figures read 19 million tons.

But with inflation concerns on the anvil, India’s sugar surplus is not expected to reach the international markets, other than the 5 lakh tons that has already been approved by the EGoM (Empowered Group of Ministers).

Can we say a sugar bull is in the offing?

source: commodityonline

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