Sugar prices defy rising supply surplus

Sugar prices are defying mounting surpluses on the back of large crops in Brazil, Thailand and China, keeping the commodity stuck at a historically elevated range of 19-22 cents a pound.

The mood in the industry has remained cautious as it gathered in London for its biennial Sugar Week, due to the uncertainty over the effects of the Brazilian weather as well as the country’s biofuel policy, which in effect puts a floor under the market.

These factors mean that although the sugar industry faces its third consecutive annual supply surplus, prices have failed to fall far below 19 cents a pound this year. Brazil is the world’s largest sugar exporter in the world, accounting for over 40 per cent all exports.

Farideh Bromfield, head of research at ED&F Man, one of the largest traders of soft commodities, said the mood at this week’s industry gatherings had been “downbeat” despite the encouraging longer term talk.

The market seemed to be hamstrung due to the uncertainty over the Brazilian output figures for the current crop season due to the unpredictable weather over the past few weeks. “We need to get over this hump for prices to go anywhere,” said Ms Bromfield.

Apart from the weather, the so-called “ethanol parity” – the price level at which it becomes more profitable for Brazilian processors to turn their sugarcane into ethanol – is providing support.

The ethanol parity is at about 17 cents a pound, and with the Brazilian government widely expected to increase the amount of ethanol mixed into petrol from 20 per cent to 25 per cent next year, “the Brazilian mills are likely to hold off selling”, said Robin Shaw, analyst at brokers Marex Spectron.

The short term uncertainty comes amid a bullish long term backdrop, with demand for sugar in developing countries forecast to rise as their economies grow. Jonathan Kingsman of consultancy Kingsman, which was bought by McGraw-Hill’s price reporting agency Platts this month, forecast world sugar consumption to grow by 32m tonnes by 2020, an increase of 2.2 per cent a year.Meanwhile, the price of white, or refined sugar, which has remained relatively high, is also behind the reluctance of raw sugar traders to take bearish positions. On Thursday, raw sugar fell 1.3 per cent in New York to 19.90 cents, down 15 per cent from the start of the year.

Sources from: The Financial Times Limited 2012