Brazil crop worries boost sugar prices

The price of sugar jumped more than 5 per cent on Tuesday to hit a 3½-month high as traders worried about lower production in Brazil, the top exporter.

The surge in prices marked a rapid reversal of fortunes for sugar, which until recently had been among the worst performing commodities this year. From February to May, prices fell 43 per cent from a 30-year peak of 36.08 cents a pound as traders focused on the prospect of larger than anticipated supplies from Thailand, India and the European Union.

Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/b4c61d80-a1a4-11e0-b9f9-00144feabdc0.html#ixzz1Qg54gWXw

But since then the benchmark sugar futures contract, ICE raw sugar for July delivery, has jumped 44 per cent to hit 29.38 cents on Tuesday.

The sharp rally has been triggered by a reappraisal of the outlook for the crop in Brazil. The South American country is critical to the sugar market, accounting for about a quarter of world production and more than half of global exports.

Moreover, it is the only large exporter to produce sugar during the northern hemisphere summer. With inventories at extremely low levels after two years of high prices, any large disruption to the Brazilian crop has the potential to trigger a price spike, analysts say.

“There is this critical period from May to October when the world needs that Brazilian sugar and is much more vulnerable to a potential shortfall,” said Jonathan Kingsman, head of the Lausanne-based Kingsman consultancy.

Early expectations were for a large crop of 35m tonnes of sugar or more from Brazil’s main sugar-growing southern region. But the outlook has been scaled back in recent weeks after early reports from farmers showed a fall in yields from last year.

Now some traders are predicting sugar output of 32m-33m tonnes – “a disaster”, as one put it. Last year, production was 33.5m tonnes. The drop in output is the result of an ageing cane crop, because high prices have made Brazilian farmers reluctant to replant cane in recent years. Heavy rains early this year combined with dry conditions last year have knocked output expectations further.

Finally, some traders are concerned that a drop in ethanol production could prompt the Brazilian government to force mills to use cane for ethanol rather than sugar.

“There seems to be a pretty significant competition between Brazilian drivers and sugar importers in the world,” said Keith Flury, agricultural commodities analyst at Rabobank.

Unica, the Brazilian cane industry association, said on Tuesday that it was likely to revise down its 34.6m tonne forecast for the current season’s production. Sugar production so far this season was down 25 per cent on the same period last year, Unica added, although that was partly the result of a late start to harvesting.

source: FT