Futures pricing suggests that India may take an unusually high
profile in the sugar market next season, making the market potentially more
sensitive to the monsoon than many investors believe.
ED&F Man, while raising by 400,000 tonnes to 2.8m tonnes
its forecast for the world sugar production surplus in 2014-15, highlighted the
"very poor" start to the monsoon in India, the second-ranked producer of the
sweetener, and top consumer.
Although the monsoon has started normally in Uttar Pradesh, the
second-biggest sugar producing state, rains last month in in third-ranked
Karnataka were 65% below average, and those in top-ranked Maharashtra nearly 70%
"The start of the monsoon has been very poor in central
India," the agricultural commodities trading house said.
'Monsoon is becoming
The dearth of rain has left cane yields "under threat" while
also, combined with cloudy weather, raised the prospect of crop flowering, an
event which also tends to reduce productivity.
"[Sugar] production downgrades from current estimates of 25m
tonnes may occur if dry weather persists through July," ED&F Man said.
Disappointing Indian sugar output may, this time, have an
unusually large impact on world prices, the group said, highlighting the flat pricing
of futures beyond the March 2015 contract, rather than the more typical premium
for later contracts.
This structure, giving producers little incentive to hold on
for higher prices, "suggests some tightness in the market at precisely the time
India could be exporting surplus production", ED&F Man said.
"As such, this year's monsoon is becoming pivotal for both
the size of India's supply and demand balance, as well as the extent to which
Indian exports can influence global prices and tradeflows in the year ahead.
"Despite a somewhat diminished presence in recent years, the
'king of swing' may yet take centre stage," the trading house added, referring
to India's nickname in sugar markets, gained for its volatile production
The comments come amid a focus for now on the progress of the cane harvest in Brazil, where the key Centre South region is suffering persistent drought expected to prompt a drop in sugar output this year.
Meanwhile, rival sugar trader Sucden Financial
also highlighted the weak start to India's rainy season, saying that "the
latest we hear is a poor monsoon generally but potentially a devastating
drought in some western areas, where precipitation levels a month into the
season are 90% behind the norm".
However, earlier this week, Green Pool, the Australia-based
sugar analysis group, suggested that "good reservoir levels" left over from
last year's strong monsoon may "buffer" India from a weak monsoon, which many
observers are linking to the onset of an El Nino weather pattern.
Green Pool estimated Indian sugar production in 2014-15 at
25.4m tonnes, a rise of 1.0m tonnes year on year, and reflecting an expectation
of a rise of more than 1m tonnes, to 8.8m tonnes, in output in Maharashtra.
EU upgrade ahead?
ED&F Man - explaining its upgrade to 2.8m tonnes in its
forecast for the world sugar production surplus in 2014-15, starting in October
– said that crops in the European Union, Thailand and the US "have been making
In the EU, the sugar beet crop "looks set to produce
excellent yields as weather conditions across the northern beet belt have remained
favourable and planted areas are up.
"Our initial estimate of 17.6m tonnes [for sugar production]
may see some considerable upside."
The group's forecast of a world sugar production surplus in
2014-15 contrasts with estimates from some other observers of a deficit, which
Platts Kingsman has forecast at 239,000 tonnes, and Datagro at 2.46m tonnes.