Commerzbank lifts sugar forecast. But can the rally last?

(Agrimoney) – Commerzbank lifted its forecast for sugar prices, citing the prospect of the first sugar production deficit in six years.

The bank lifted by 2 cents a pound, to 14 cents a pound, its forecast for spot New York raw sugar futures for the first three months of 2016.

Sentiment in the sugar market has been revived by the looming sugar deficit, which will see demand outstrip supply in the coming season, eating into the massive backlog of accumulated sugar.

“With global inventories likely to decline in (at least) two subsequent years, sugar prices have stopped to fall and even risen again recently,” Commerzbank said.

Indian production eases

Commerzbank flagged declining production in India, where the Indian Sugar Mills association expects output to fall 5% in the next season, after disappointing rainfall.

“According to the India Meteorological Department, they have been 14% below the average during the current monsoon season; in Maharashtra and Uttar Pradesh, the most important producing states, they have been even lower,” Commerzbank said.

Lower rainfall in India is associated with the El Nino weather phenomenon.

Exports unclear

Commerzbank also noted that India will struggle to push its large sugar inventories on to the world market, as government price support make them uncompetitive.

“It is still unclear how the government will make sure that exports will amount to 4m tonnes, as planned, now that export subsidies have run out.”

“So far, exports had been made attractive only by subsidies, as world market prices have been low.”

Rapid price rally

But concerns are gathering whether the recent rapid increase in prices is sustainable.

Sugar futures for March 2016 are currently trading above 14 cents a pound, from lows of 11.26 cents a pound in late August.

“Following the sudden jump in raw sugar prices, a setback seems possible,” warned Commerzbank.

Danger of ‘quick collapse’

Analyst Judith Ganes-Chase also saw the danger of a market correction.

“The market vaulting higher too quickly could hurt its ability to sustain the gains rather than having the market rise more slowly but steadily,” she said.

“Any time markets make beeline moves straight up the chances of a fairly quick collapse are great and sugar certainly is not likely to be an exception.”

Brazilian credit

“The quick pop in prices is likely to discourage whatever limited offtake there has been and clamp down offtake while at the same time keeping producers from reducing productivity and making necessary cutbacks that could limit production growth for 2016-17.”

Ms Ganes-Chase also noted that the prospect of further Brazilian sugar mill closures, which would have restricted supply, had retreated as much-needed credit returns to the sector.

She said that “the industry received an infusion of financing last month that should help to ease some of the financial struggles and that would be bearish for the market”.