Brazilian uncertainty will cap the sugar boom, SocGen says

(AgriMoney) –  The rally in sugar prices has nearly run out of road, Societe Generale warned, as it noted the threat of heavy Brazilian production hanging over the market.

“Too many uncertainty and moving parts” are preventing a strong sugar rally, despite the bullish fundamentals, analyst Rajesh Singla said.

“We believe that market fears with respect to Brazil are justified,” said Mr Singla, suggesting that rising production and a falling currency in the world’s top producer would cap rallies for the sweetener.

‘Slow and steady’

“Our base case for sugar is a steady and slow up-move from current levels to 18 cents a pound in 2017,” Mr Singla said.

October raw sugar futures in New York are currently trading at $17.93 a pound, with front month July futures at $17.84 a pound.

“We believe that there are too many uncertain moving parts which are restricting the potential for a sharp up-move in sugar prices.”

SocGen believes that “political developments in Brazil, fluctuations in the dollar real exchange rate and the size of sugarcane crushing in Brazil are likely to be the main drivers of sugar prices”.

“Expectations of a recovery in production in Asia also add further uncertainty,” the bank added.

Brazilian output

Mr Singla forecasts Brazilian sugar production to rise by 11.5% in the 2016-17 crushing season, which is already underway, hitting 39m tonnes, with 34.5m tonnes coming from the Centre South cane belt. The bank forecast low and high scenarios of 37 and 41m tonnes respectively.

The prospect of rising production in Brazil suggests there will be no quick end to sugar market uncertainty, as markets remember the long term down-turn sparked by booming production in the past.

“The significant increase in production by Brazilian sugar and ethanol mills since 2010-11 and deprecation of the real sent sugar prices into a severe multi-year downtrend, which almost killed the global sugar industry,” he said.

Deficit priced in

SocGen noted bullish fundamentals, with the sugar market in global deficit, and stocks to ratio numbers easing.

But the bank said that current pricing reflected expectations of a deficit, leaving markets vulnerable to any shift in fundamentals.

“With non-commercial positions near historically high levels, we believe that most of the upside potential is already priced in.

“As the sugar market moved into deficit, non-commercials turned extremely bullish on sugar from September 2015.”

Currency to ease

Sugar has been gaining strength from the rallying Brazilian currency.

The real is rising on ideas that the ongoing impeachment of Brazilian president Dilma Rousseff will usher in a more market friendly regime.

A stronger real is supportive for sugar prices, as it reduces real denominated returns for sugar producers, discouraging production and selling, while encourage sugar buyers to increase their dollar-denominated purchases.

But SocGen forecast the Real to slump back at the end of the year, from current levels of R$3.5-3.6 to R$4.1 by the end of the year.

SocGen’s economics team suggested “the domestic factors are unlikely to improve meaningfully in the medium term despite the political and administrative changes.

“Fiscal consolidation remains difficult and could further add to growth woes.”