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The Financial Times
Sugar prices head towards the skyBy Javier Blas in London
Published: July 29 2009
The sugar market is watching the heavens as bad weather in Brazil and India, the world's two largest producers, threatens crops and pushes prices skyward.
Traders and industry executives say, in rare agreement, that sugar prices could hit a 28-year high - above 19.73 cents per pound - later this year because of poor weather, steady consumption and low global inventories.
The price of the sweetener has surged recently to a three-year high, with raw sugar at 18.5 cents per pound and white sugar at $485 a tonne yesterday.
"There is continued upside price risk, even from today's elevated level," says John Sheptor, chief executive of Imperial Sugar, one of the largest sugar producers in the US. "Prices could move considerably higher," he adds in an interview with the Financial Times.
This bullish sentiment has filtered beyond the usual players, bringing speculative investors to what is usually a dull market handled by merchant and brokerage houses. Traders say that raw sugar prices could surge above 20 cents per pound later this year, with the most bullish dealers talking about a target of 25 cents. Meanwhile, white sugar in London could move above the key $500 a tonne mark.
The physical sugar market will be at its tightest between November and April, traders say, adding that ahead of that period, the market could see a relatively small correction. They forecast that the price peaks will be seen in the ICE March 2010 raw sugar contract, rather than in the current benchmark October contract. The March contract, at 19.5 cents, is already trading at a hefty premium above October.
Speculators are not only buying futures, but also call options - contracts that give holders the right to buy at a predetermined price and date - at a strike price as high as 30 cents, suggesting they expect some explosive moves in prices, traders say.
Among the physical trading houses, dealers say that Cargill, the US giant, and Switzerland-based Glencore are among the most bullish.
The latest wave of buying has come after a poor start to the monsoon in India, with districts in the critical Uttar Pradesh state already suffering from drought. As a result, India's sugar cane output is likely to drop in 2009-10. As the world's largest consumer and second- largest producer, India's output swings, which move the country back and forth from exporter to importer, are a key factor in prices.
Traders say India's output, initially expected to rise to about 20m tonnes, could drop to 17m-18m tonnes, a small recovery from the disappointing level in 2008-09 of 15m tonnes.
Leonardo Bichara Rocha, an economist at the International Sugar Organisation in London, says that if the monsoon rains do not recover soon, he would not be surprised if India's 2009-10 sugar output finally is "as low as in the current season" as cane planting has already dropped.
With local consumption above 22m tonnes, New Delhi will be forced to tap the global sugar market for the second season in a row to offset the domestic deficit and avoid a dangerous run down in inventories.
While India suffers from drought, in Brazil, the world's largest producer and exporter, it is just the opposite.
Dry and hot temperatures should now be helping the sugar cane harvest in the centre-south of the country, but instead it is cold and raining. The wet weather is delaying the harvest and lowering the cane's sucrose yield, which, in turn, will reduce potential raw sugar production.
Before the weather problems, Unica, Brazil's sugar industry body, was expecting sugar output from the country's centre-south region to reach 31.2m tonnes this season, but now officials believe it could drop to about 30.5m tonnes.
Nicholas Snowdon, a soft commodities analyst with Barclays Capital, says that weather problems have laid the way for "a global deficit of historic proportions, thus offering a seemingly irrefutable fundamental case for strong price performance".
While attention has focused on India and Brazil's production problems, there are other supportive supply glitches elsewhere, including Russia, Pakistan, Thailand and Mexico, all helping to a market deficit.
"Globally, sugar stocks are low and we can see the potential for a quite pronounced physical deficit in the first half of next year," explains Desmond Monteith, portfolio manager at CZAR+ sugar hedge fund.
Demand, meanwhile, is holding up better than expected. Mr Sheptor says, for example, that global consumption is flat, a performance he considers good taking into account the economic crisis. "Sugar is a non-expensive source of calories," he says. "Demand will hold."
Whether consumers, particularly in relatively poor developing countries, will continue buying if prices reach for the sky, remains to be seen.
www.ft.com/cms/s/0/73ee49ee-7b...