SUGAR prices have shot through the roof in the last week, with sugar number 11 – the main benchmark for raw sugar prices – rallying comfortably over 28 cents per pound, double its price in late 2008. Commodity traders might be licking their chops at the thought of a sharp correction – or even a further extension of the rally – but trading on this crop requires the utmost caution due to the unpredictability of harvest yield data.
In general, soft commodity prices tend to move quickly due to their heavy dependence on the weather, but even so the recent rally – coming straight after a two-cent correction to 23 cents in mid-October – has raised eyebrows. It comes on the back of two years of below-par harvests in the world’s biggest sugar producers. India and Brazil together produce some 40 per cent of the world’s raw sugar, but while Brazil tends to export most of its crop (see chart), India consumes nearly all of its yield – and often imports during a bad year.
With world sugar stocks diminished and demand on the rise, even an improving yield can coincide with rising prices. For example, the yield in Brazil’s centre south region, which produces most of its sugarcane, is forecast to come to 34m tonnes when the harvest finishes next month. That is 5.4m tonnes more than last year, and yet analysts nonetheless expect the price to stay high. Societe Generale’s Emmanuel Jayet says: “The production would have to compensate for the two previous deficits and demand is increasing so when you look at production of 34m tonnes, it is still not enough.”
The other yield to watch is in India, particular in the Uttar Pradesh region, which has seen heavy rains this year. At first glance, prospects look good and should bring the price down. Barclays Capital’s Sudakshina Unnikrishnan says: “Expectations this year were for a rebound in Indian production – we’ve seen the Indian government starkly increase the amount sugar mills had to pay sugar farmers for cane.” Production in India is highly regulated, with Dehli deciding how much to export and what prices are paid, so the government’s attitude is pivotal.
But even while farmers are being paid more to grow cane, grain price rises also make cereals an attractive option. And there is another factor to consider: the unreliability of yield forecasts. While BarCap’s Unnikrishnan predicts that the sugar price will continue to rise, from an average price of 26 cents per pound in the fourth quarter 2010 to 27 cents during the following quarter, SocGen’s Jayet is much more reluctant to make a forecast before December this year. The harvest has just started in India, but data for Uttar Pradesh is much less reliable than for Brazil: “In January there was a wide confidence that the crop would be around 13-14m tonnes and in the end it was almost 19m.”
This means that while any short-term price dips could provide profitable entry points for bets up to the end of the year, it is risky business. A sudden government decision on exports or a data revision could spark a correction at any time: as with other softs, punters should bet carefully to avoid being left with a sour taste in their mouth.