Bullish sugar scenario seen emerging in 2014/15 after slump

(Reuters) – A potentially bullish scenario is developing for global sugar prices in 2014/15 after the prolonged slump due to projections of sluggish production and stronger growth in world consumption.

Macquarie Commodities Research said in a report that it believes the forward curve is significantly underpricing sugar for the 2014/15 season.

Kona Haque, Macquarie’s senior soft commodities analyst, said a lack of new milling investments in top grower Brazil, a shift out of beet production in Russia and Ukraine, and higher-than-expected global demand, augured for a recovery in prices.

“That would warrant a turnaround in sugar prices in 2014/15 after the prolonged slump,” Haque said.

ICE front-month raw sugar futures touched a three-year low of 15.93 cents a lb on July 16, under pressure from a huge global surplus. ICE front-month futures were flat at 16.97 cents a lb on Thursday.

BRAZILIAN MILLING CAPACITY

Brazil has seen minimal addition to sugar milling capacity in the last few years, Macquarie said.

“Production today is close to full capacity, and even if the cane crop rises further next season, the main growing region of centre-south Brazil would still only be able to crush 600 million tonnes or so due to capacity constraints,” it said.

Several analysts said it was still too early to make confident price predictions for 2014/15 as planting intentions and crop performance for this season were still unknown.

They said beet producers would switch more quickly than cane growers out of sugar due to low prices, and predicted a falling beet area in Russia and Ukraine as growers planted more lucrative grains.

“A signal of a price recovery could be if global cane production started to fall,” Stephen Geldart, senior analyst with London-based commodities house Czarnikow, said.

Several also believed that global sugar consumption had been underestimated by the trade community, and said demand growth was set to quicken to 2014/15 in response to low prices.

One analyst said annual sugar consumption was set to rise by around 2 percent from 2012-14, as prices had fallen, up from around one percent in 2009-11 when prices were mainly higher.

“Our current projections are for a 2014/15 trading range of 19-22 cents a lb, versus the back end of today’s forward curve (March 2015 futures) at 17.5 cents a lb,” Macquarie said.

James Cordier, principal and founder of Liberty Trading Group and Optionsellers.com, said he believed sugar prices would have to fall further to erode investment in cane production.

“We’ve been in a slow grind to the downside. Usually we need to stay lower longer to establish a floor. I’d be more inclined to say we need to see sugar at a floor at 14 or 15 cents,” he said. “That would create a real problem for future production.”

Sterling Smith, a futures specialist with Citigroup in Chicago, said, “We may see a little bit of production tightening but curtailing cane production is not quite that easy.”

HIGH STOCKS

Leonardo Bichara Rocha, a senior economist with the International Sugar Organization (ISO), said the high stocks to consumption ratio would slow down a recovery in prices.

The sugar stocks to consumption ratio, standing at above 40 percent in 2012/13 for the first time since 2007/08, was expected to remain high next season, he said.

China, a leading raw sugar importer, has built up huge sugar stocks, as importers took advantage of price dips.

A number of sugar producing origins, such as China and the European Union, have protected markets, reducing incentives to growers to switch out of the crop if international prices fall.

Any sugar price recovery in 2014/15 will ultimately hinge on the weather, notably in Brazil, and the exchange rate between the Brazilian real and the U.S. dollar as millers receive income from dollar-denominated sugar in local currency.

“If someone starts talking 19 to 20 cents a lb sugar next year, you would have to wonder if they have factored in the effect of a stronger dollar on mills’ production plans,” Arnaldo Correa at commodities risk analyst Archer Consultaria said.

“Nobody expected the real to go to 2.25 to the dollar early this year and yet here we are. When the real was at 2 to the dollar, mills were still making money at 20 cents lb sugar. Now we are at 2.25. If we reach 2.60-2.70 to the dollar, mills will be making money from sugar at 15 cents a lb.” (Reporting by David Brough; Additional reporting by Chris Prentice in New York and Reese Ewing in Sao Paulo.; Editing by David Evans)