Sugar Futures Poised For Strong Rebound

Sugar futures present a buying opportunity – at least, those for distant delivery, which could see gains of some 25% given the damage to production prospects provided by current prices at three-year lows.

New York's October raw sugar contract on Tuesday hit 15.93 cents a pound, the lowest for a spot lot since June 2010, depressed by decent weather for harvesting cane in Brazil, the top producing country, and growing it in second-ranked India, besides by a round of producer selling.

"The drop was also attributed to the Brazilian real weakening against the dollar, which encouraged producers to sell the dollar-denominated commodity to alleviate currency loss," Joyce Liu at broker Phillip Futures said.

The decline has been felt throughout the futures curve, with the March 2015 lot, for instance, setting a contract low of 17.47 cents a pound on Tuesday.

Clear deterrent

However, even if pressure remains on prices short-term, "as we approach the peak of the Brazilian Centre South crush and as the Brazilian currency continues to weaken", investors may be too gloomy over long-term prospects, given the incentive that low values are giving to producers not to invest in output, Macquarie said.

Even the values of March futures are below costs of producing sugar, which the bank estimates at about 18 cents a pound for Australia and Thailand, and 20 cents a pound "if not higher" for India and Europe.

Brazil's average industry breakeven costs rose above 21 cents a pound in 2011, but have since retreated to about 17.7 cents a pound thanks to the depreciation of the real.

"We think this will be a clear deterrent to producers from investing in further mill expansion," Macquarie analyst Kona Haque said

Beet vs cane

Indeed, given the need for a strong incentive to attract investment into cane mills and a crop which takes some three to reach its full potential, "prices need to stay 5-6 cents a pound above costs of production for a sustained period before new investment can take place", Ms Haque said.

Indeed, producers of beet, an annual crop for which area can easily be switched to grains, "will be the first to respond to the negative price trend," led by Russia and Ukraine, "followed by other high cost producers".

Former Soviet Union growers have already cut back on beet sowings, with consultancy Ikar forecasting an 18.9% drop to 3.85m tonnes in Russian sugar output in 2013-14.

Market trend reversing

While annual world sugar production has grown some 9% since 2010-11 to an estimated 179.1m tonnes, "at today's prices it is questionable whether we can repeat such a strong supply growth", Ms Haque said

Output growth, which has already more than halved below 3% from levels of the past two seasons, is still to fall to about 1% by 2014-15.

With demand expected to rise by 2.4% in 2014-15, encouraged by stockpiling at low price levels, the world will fall back into a production shortfall that season of about 2m-3m tonnes.

"With the market trend now reversing into one that is tightening, as opposed to loosening, we would expect prices to respond," Ms Haque said, foreseeing prices ranging from 19-22 cents a pound in 2014-15.

"This is clearly much higher than the 17.8 cents a pound currently priced in the futures forward curve."