Sugar Shortage Seen Looming by Drake Amid Drought in Brazil

(Bloomberg) – The world sugar market is heading for its first deficit in five years as drought cuts supplies in Brazil, the top producer and exporter, RCMA Group Pte said.

The country’s cane harvest may decline about 10 percent in the year starting April 1, said Jonathan Drake, chief operating officer of the Singapore-based trading company. Sugar output may drop as much as 3.5 million tons next year as more cane is used for ethanol, he said in an interview on Oct. 3.

Futures in New York plunged 53 percent from the highest in three decades in 2011 as farmers planted more cane. Dry weather in Brazil and India, the two biggest producers, may cut output and reduce global reserves for the first time since 2010, the U.S. Department of Agriculture estimates. Brazil, which is holding a presidential election, has increased the amount of ethanol used in fuel and may raise gasoline prices, Drake said.

“Overall we have a small deficit looming,” said Drake, whose company will probably trade more than 450,000 tons of refined sweetener this year. “Once the election is over in Brazil, once they work out what the new gasoline-ethanol price will be, I’d imagine in the next 90 days sugar reaches the bottom for the next three years,” said Drake, who traded the commodity for more than two decades at Cargill Inc.

Prices climbed to 17.12 cents a pound on Oct. 7, the highest level in four weeks, after advancing 6.2 percent in September, the most in seven months. Futures added 0.7 percent to 17.04 cents on ICE Futures U.S. today.

Ethanol Boost

A victory for presidential candidate Aecio Neves would help business and may boost the ethanol industry, Drake said. The government raised the ethanol part of the gasoline mix to 25 percent from 20 percent in April last year. The Senate approved an increase to 27.5 percent in September. Most cars have engines that run on ethanol or a mix with gasoline.

The country’s cane harvest will already be lower this year. The crop is set to decline 4.8 percent to 619 million tons mostly because of weather problems in the center-south growing areas, the USDA’s Foreign Agricultural Service estimates. A weak monsoon may trim the harvest in India, Drake said. Production could fall to 342.8 million tons from 350 million tons, the Agriculture Ministry says.

Global sugar inventories are set to drop 2.4 percent to 44.4 million tons by the end of 2014-2015, the first decline in five years, USDA data show.

While Drake predicts a shortage is looming, the International Sugar Organization forecasts the world will have a surplus of 1.3 million tons in 12 months started Oct. 1, the fifth straight annual glut, while the impact of any production shock would probably be reduced by large stockpiles.

Stored Sugar

Output is set to expand 0.6 percent to 183.75 million tons in the coming year, while consumption increases 2.1 percent to 182.45 million tons, the London-based group estimates. While there will be a surplus, it will be less than the oversupply of 3.99 million tons in the previous 12 months, it said Aug. 26.

In Thailand, the world’s second-largest exporter, the government is encouraging farmers to plant sugar instead of rice to reduce a glut of the grain. While it’s too early to tell, that may help add one million tons to domestic output, Drake said. Shippers could prefer to keep the sweetener in store and wait for a price rally as futures indicate a premium for deliveries in later months over nearby dates, he said.

Rabobank International is keeping a “constructive” view of prices for 2015, the bank said in a report dated today. Demand will exceed supply by 3.2 million tons in the year started October compared with an almost balanced market in the previous 12 months, the bank said.

A decline in the Brazilian real against the dollar has been “the big bearish thing” for sugar, which is denominated in the U.S. currency, Drake said. The real slumped 11 percent in the third quarter. President Dilma Rousseff faces a runoff against second-placed Neves in the final round on Oct. 26.