views

There’s still some sweetness left in the price of raw sugar this year

IF THERE was any commodity guaranteed to provide sweet profits for traders in the second half of 2009 it was sugar. Raw prices have more than doubled since mid-2009 to almost 30 cents per pound at the end of January, their highest level since 1981. Like other commodities, sugar has since taken a bit of a caning, partly as a result of a stronger dollar. Traders are now asking whether this correction is the sign of further weakness ahead.

Understanding what has driven the sugar price is crucial for contracts if difference (CFDs) traders are to forecast where it is heading next. There were three stages to the rally in the second half of 2009 says Societe Generale’s Emmanuel Jayet. First, it emerged last spring that India, the second largest producer of sugar behind Brazil, had a disappointing crop; second, detrimental weather conditions in Brazil and India – too much rain in the former and not enough in the latter – increased the chances of another huge world sugar deficit; and finally, strong demand in Asian countries such as India and Pakistan sent raw sugar prices soaring.

Such a combination of drivers is unlikely to continue in its current form. Jayet says: “Thanks to current high prices, world sugar production is most likely to increase and the world sugar market will shift from deficit to surplus.”

In Brazil, the 2010/2011 season should see a marked rebound, with a yearly increase of 5m tonnes looking achievable. And in India, the planted area could increase by about 10 per cent so production could also increase by 5m tonnes to 20m tonnes. This means that world sugar production could reach 171m tonnes as early as the 2010/2011 season, setting a new record. Compared to world
consumption of 169.5m tonnes, this surplus would help world stocks to stabilise.

Sugar prices will be heading lower eventually, says Jayet, adding: “The sugar market will probably need another year of higher production in order to recover fully – so this will not happen before the 2011/2012 season.”

But supply shortages are expected to continue for now. “Prices appear vulnerable to short-term spikes as countries hit by poor harvests have to import in size, notably India and Pakistan,” says Shaun Port, chief investment officer at Fitzwilliam Asset Management. These near-term supply shortages are reflected in the March contract trading at a very significant premium to the July contract.

Traders can take advantage of these spikes. Recent reports on the ongoing Indian harvest show that yields and sugar content are both low. This could lead to a further downward revision to 2009/2010 Indian production figures, which might mean that India will have to import more than is currently expected, says SocGen’s Jayet.

CFD traders considering trading sugar should pay attention to weather reports in both Brazil and India as well as harvest updates. These could be the catalyst for further rallies in the price towards the multi-decade high set just a fortnight ago.