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Monsoon fears, Brazil ethanol drive sugar rally

Sugar futures took their gains in two sessions above 5% as weak data on Indian monsoon added to concerns over a Brazilian ethanol change to question ideas of ample supplies of the sweetener.

Raw sugar for July jumped 2.3% to $17.94 cents a pound in midday deals in New York, its highest in nearly a month, taking gains in two sessions to 5.1%.

The October contract, which now attracts higher trading volumes, gained 1.9% to a one-month high of 18.69 cents a pound.

The peaks followed the release of data showing India's monsoon continuing to run late, and deposit disappointing levels of rain, during its early stages, raising concerns over crops including sugar cane.

'Reason to add back risk premium'

India's monsoon rains were, in the week to Wednesday, 45% below average, only a small improvement on the 48% deficit the week before, weather officials said, estimating that the weather pattern was running four days behind schedule too.

"It has been a reason to add back a bit of the risk premium," soft commodities analyst in London said, if noting that strong water levels in irrigation systems were reducing concerns over the late monsoon for now.

At Citigroup in Chicago, Sterling Smith said that "there is an issue with the monsoon in India," the second ranked sugar producing country after Brazil, and the top consumer.

"It is likely giving the funds cause to cover their short positions."

Queuing ships

However, other reasons too were cited as behind the rally, with the London analyst noting that the "vessel line-up in Brazil and has picked up a little bit compared with last month", indicating a potential squeeze on the country's exports.

This may only get more acute if the El Nino– which often causes a weak monsoon – arrives as expected, with the weather pattern also linked in Brazil to heavy rains, which can hamper loading of sugar cargoes, which are damaged by water, in all but roofed facilities.

In fact, the US Climate Prediction Center forecast an 80% chance of declaring an El Nino in the autumn, with one key indicator, the weekly sea surface temperature departure in a key part of the Pacific, 0.4 degrees Celsius above average - 0.1 degrees below the El Nino threshold.

More ethanol

Citigroup's Mr Smith also cited talk of an agreement between Brazilian authorities and vehicle makers to raise by 1 point to 26% the proportion of ethanol blended into gasoline in the South American country.

"That means more cane going for making ethanol and less for sugar, which should make sugar prices go up," Mr Smith said.

Sucden Financial estimated at 575,000 tonnes the amount of sugar production that will be lost to enable the increase in output of ethanol, of the anhydrous variety which can be mixed with gasoline.

That said, the agreement "is not what the millers were hoping for", Sucden added, noting that cane industry group Unica, and oil giant Petrobas, were pressing for a 27.5% blend rate.

The Anafavea carmakers' association opposed this level on grounds that it may cause difficulties starting engines.

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