Steep sugar futures curve 'to get more extreme'

Futures prices in sugar, already offering buyers the biggest incentive in six years to accelerate purchases, are to offer even bigger sweeteners, given the extent of producers' unsold inventories, ED&F Man said.

Agricultural commodity markets typically trade in a contango structure, with prices of forward contracts more valuable than those for near-term delivery, offering some premium for production risk and storage charges.

However, near-term sugar futures has opened up a particularly large discount to those for further-ahead delivery, of some 1.7 cents a pound as measured between the October 2014 contract and the March 2015 lot.

It has topped 1.8 cents a pound, the widest since September 2008 for a discount of October futures to the following March contract.

And the discount looks like increasing further, given the extent of supplies producers need to clear, sugar merchant ED&F Man said.

'Discount to widen'

World sugar inventories at the close of 2013-14, next month, look like hitting 53m tonnes, "much larger" than the 45m tonnes at the close of 2007-08 which drove the elevated spread six years ago, the merchant said.

Indeed, then, the discount of the October 2008 contract to the March 2009 lot topped 2.1 cents a one point.

The extent of the current stocks "means warehousing capacity needs are that much greater", and likely at higher costs than six years ago, and with the inventories, built up over four seasons, likely containing older supplies which producers will be keen to dispose of.

"The existence of surplus sugar without a home is seemingly becoming a challenge for some large producers."

Meanwhile, the balance of inventories appears different than in 2008, with refinery stocks "much more replenished compared to 2008", and "much quieter" physical demand.

"Hence it is likely that the front month discount will have to widen further if bargain hunting opportunities are to encourage additional short term off-take," ED&F Man said.

ANZ forecasts

The comments came as the London-based merchant kept at 2.8m tonnes its estimate for the world sugar production surplus in 2014-15, contrasting with some expectations among other commentators for an output shortfall.

Separately, Australia & New Zealand Bank expanded on forecasts on Friday that sugar prices will "remain under pressure" in the current quarter, highlighting the potential for some recovery further ahead.

Elevated stocks levels in Brazil, a result of a rapid start to the cane crushing season, will not last, "with the better harvest progress to date only taking away from production and harvested volumes in October and November.

"This should provide scope for sugar prices to firm into the fourth quarter of 2014 and the first half of 2015," the bank said if cautioning over the potential impact of moves in the Brazilian real both before and after the October elections.

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