Sugar to Climb Near 24-Year High on India, Brazil (Update2)
By Shruti Date Singh and Thomas Kutty Abraham
Sept. 15 (Bloomberg) -- No matter what happens in the global economy, sugar demand is about to top production for the first time since 2006, the year prices reached a 24-year peak.
India, the second-biggest grower, will reduce supplies 16 percent next year, shifting to more profitable crops. Brazil, the largest producer, expects to use 57 percent of its cane for ethanol this year, up from 54 percent. Refiners in Europe will process 15 percent less because a 2004 trade ruling bars growers from exporting surpluses.
``The fundamentals for next year are better than in the last 12 months and are the best for market values in the last three seasons,'' said Sergey Gudoshnikov, a senior economist for the London-based International Sugar Organization, which represents countries producing 82 percent of the world's sugar.
The shortfall may make sugar one of the only commodities to continue rallying even as the slowing global economy reduces demand for raw materials from aluminum to oil. Sugar use isn't affected by price swings in developed countries, while people are eating more sweeteners in China and India, the largest consumer, according to London-based ED&F Man Holdings Ltd.
Sugar on ICE Futures U.S. in New York may jump 28 percent to 18 cents a pound next year from 14.06 cents on Sept. 12, said analyst Jonathan Kingsman in Lausanne, Switzerland, whose firm Kingsman SA advises banks, hedge funds and Fortune 500 companies on commodity purchases. Kona Haque, a commodity strategist at Macquarie Bank Ltd. in London, said the price may reach 20 cents, and Jean Bourlot, a managing director and head of agricultural trading at Morgan Stanley, said it may double in 18 months.
The sweetener traded at 13.61 cents today in New York.
Commodity Bear Market
The S&P GSCI Index of 24 commodities, after six straight years of gains, has plunged 31 percent from a record on July 3 and slipped into a bear market as global economic growth slowed. Natural gas, silver and crude oil led the declines.
In the meantime, ``crop competition, booming ethanol demand and declining sugar beet areas globally signal higher prices,'' London-based Bourlot said in a Sept. 11 telephone interview.
The last time the world consumed more sugar than it produced was in 2006, when the cane crop in Thailand was down for a third straight year and record energy prices boosted demand for alternative fuels. Futures reached 19.73 cents a pound on Feb. 3, 2006, the highest since April 1981.
In the following months, production surged in Brazil and India, sending global sugar inventories to an all-time high. The ISO estimates stockpiles will reach a record 69.2 million metric tons in the year that ends Sept. 30. Sugar prices dropped 20 percent in 2006 and 7.9 percent last year.
Record Inventories
Stockpiles will fall 5.8 percent to 65.2 million tons in the year ending Sept. 30, 2009, the first decline since 2006, according to ISO forecasts. Still, they will be 18 percent higher than in 2006.
``I just don't think sugar has any business being up over 14 cents,'' said Judy Ganes-Chase, a former Merrill Lynch & Co. commodity analyst who runs a consulting firm in Katonah, New York. ``We still need to work through that massive glut. The market is more fundamentally justified in the 9-to-11-cent range than the 12-to-14-cent range'' for 2009, she said.
Kingsman said the rally will fail if the price of ethanol from sugar cane declines and if the Brazilian currency's weakness against the dollar encourages exports onto world markets. The ISO says prices may be affected by factors unrelated to supply and demand, from energy use, to food policy and shifts by investors away from commodities.
Production Deficit
Global consumption will increase 2.3 percent to 165.5 million metric tons in the next year, and production will drop 4.4 percent to 161.6 million tons, spurring a shortfall of 3.9 million tons, the ISO said. Czarnikow Group Ltd., a London-based brokerage and consulting firm that has been in the business since 1861, puts the deficit at 3.3 million tons.
Higher prices may boost profits at Brazil's Cosan SA Industria e Comercio, the world's biggest sugar-cane processor, and at Bajaj Hindusthan Ltd., India's largest producer. Costs may rise for buyers such as Nestle SA, the biggest food company.
One reason analysts forecast inventory declines is more of the crop is being used to make ethanol rather than sweetener.
Piracicaba, Brazil-based Cosan is stepping up production of the fuel and expects sugar to stay above 14 cents a pound next year, Chief Financial Officer Paulo Diniz said Sept. 12 on a conference call. The rebounding dollar and rising sugar prices may make Cosan profitable next year, after three straight quarters of losses, Vice Chairman Pedro Mizutani said. Brazil's real lost all this year's gains against the U.S. currency.
India Crop Decline
The biggest change in sugar supplies during the coming year will likely be in India. Output will plunge 16 percent to 23.9 million tons from 28.5 million tons as farmers plant more wheat, and a late monsoon may reduce yields in Maharashtra state, the country's biggest producer, according to the ISO.
``The effective withdrawal of India from the export market is a significant bull factor,'' Kingsman said.
India's exports may plunge more than 78 percent to less than 1 million tons in the coming year, said S.L. Jain, director general of the Indian Sugar Mills Association in New Delhi.
Shree Renuka Sugars Ltd., India's biggest refiner, bought 30,000 tons of raw sugar from Brazil for arrival in October, Managing Director Narendra Murkumbi said Aug. 27. The Mumbai- based company's purchase was the first from an overseas supplier in more than two years.
``We may import more raw sugar after December,'' Murkumbi said. ``Domestic raw material is not available and buying from the spot market in Brazil is more attractive.''
European Output
European production will fall 15 percent to 22.5 million tons in the year starting Oct. 1 from 26.5 million, according to Ratzeburg, Germany-based F.O. Licht, a soft-commodity market researcher. The European Union will produce 14 million tons, about 20 percent less than this year, after the World Trade Organization ruled the 27-nation bloc can't sell its surplus on the world market because it unfairly profited from subsidies.
Europe will help provide ``a more bullish impetus for world sugar prices,'' Licht said Sept. 9. ``That's a new phenomenon.''
The U.S., the world's fifth-biggest sugar producer, will refine 3.5 percent less of the sweetener than previously expected in the year that starts next month, and the decline doesn't fully reflect the damage caused to crops by Hurricane Gustav, the Agriculture Department said Sept. 12.
Brazil will produce 32.8 million tons of sugar this year, according to the Agriculture Ministry's crop-forecasting agency. While the estimate is higher than last year's 31.3 million tons, it's less than in April as mills turn more cane into fuel.
Ethanol Use
Global ethanol consumption will rise 34 percent to about 65.2 billion liters in 2008, mostly because of the U.S. and Brazil, the biggest producers and users of the alternative fuel, according to the ISO. Crude-oil futures closed at $101.18 a barrel on Sept. 12, up 27 percent from a year earlier, though down from a record $147.27 on July 11. Gasoline closed at $2.7696 a gallon, up 37 percent from a year earlier.
Abah Ofon, a commodities analyst at Standard Chartered Bank in Dubai, said in a Sept. 3 e-mail ethanol demand will boost sugar to an average of 16.2 cents in the second quarter of 2009.
``There's greater noise in the U.S. about the perceived inflationary impact of corn ethanol,'' Ofon said. ``There's going to be a more serious debate on opening up the U.S. market.''
U.S. Tariffs
The U.S., which mainly uses corn to produce ethanol, imposes a tariff of 54 cents a gallon on imports from Brazil.
Senator Dianne Feinstein, a Democrat from California, introduced legislation in June that would avoid penalizing foreign suppliers, including Brazil, and enable U.S. refiners to purchase ethanol no matter where it's made.
``The demand for inexpensive and climate-friendly ethanol continues to grow as oil and gas prices remain sky-high,'' Feinstein said in a statement e-mailed to Bloomberg News.
In July, when the Reuters/Jefferies CRB index dropped 10 percent, ``sugar prices bucked the broader commodity direction,'' Goldman Sachs Group Inc. said in an Aug. 7 report. ``We anticipate recovering crude-oil prices and tighter sugar supply/demand expectations to support'' the market, said Goldman, which has a 12-month forecast of 15 cents a pound.
To contact the reporters on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net; Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net |
