The sugar market retains a "bearish tone" despite the damage
to Brazil's cane crop from drought, Sucden Financial said, highlighting the
prospect of higher exports from Thailand, and reduced Chinese demand.
The agricultural commodities trade house acknowledged a
large dent to Brazil's cane harvest from "disastrous" weather which had seen
the key Centre South district, responsible for 90% of the country's sugar
output, receive 340mm rain in the December-to-February period, compared with an
average of 620mm.
"There is no (recent) precedent of such dismal levels at the
heart of the rainy season," Sucden said, pointing to losses of over 10 tonnes a
hectare in cane yield in some areas, equivalent to well over 10%.
"There is a risk" that some cane planted late in 2013 "will
'Cane can recover'
However, while cutting its forecast for the Centre South
cane harvest by 35m tonnes, Sucden's estimate of a 586m-tonne harvest remained
above that of many other commentators.
Rabobank, for example, last week cut its estimate to 570m
tonnes, in line with a forecast from co-operative giant Copersucar.
"Sugar cane is a grass and can recover somewhat on the back
of future rainfall," Sucden said, adding that rains this month, while "sometimes
scattered will already have been beneficial".
Sugar vs ethanol
Furthermore, the commodities trader highlighted the
potential for higher prices, up 22% from a March low, to incentivise mills to
turn cane into ethanol rather than sugar.
While sugar is likely to take a relatively small amount of
cane early in the cane crushing season, with producers "reluctant" to sell too
much of the sweetener for early shipment, "the current market configuration is
such that the possibility for a higher sugar mix should not be underestimated".
From July, the market is pricing in an ethanol parity
equivalent to a raw sugar price of 16.5 cents a pound, well below the 18.28
cents a pound at which New York's July raw sugar futures contract was trading
at on Friday.
Sucden forecast Centre South sugar output in 2014-15, starting
in April, at 34.3m tonnes, in line with this season's levels, and above
forecasts from the likes of FO Licht, which has pegged production at 31.1m
tonnes, and Datagro, which expects volumes of 33.2m tonnes.
China imports to 'falter'
Sucden highlighted the potential too for a pick-up in exports
from Thailand, the second-ranked sugar shipper after Brazil, where exports for
the first three months of 2014, appear to have fallen below the 1.0m tonnes a
year before, and the 1`7m tonnes in the first quarter of 2012, despite bumper production.
A record cane crop of 107m tonnes has put the country in
line for sugar output of 11.5m tonnes, up 1.5m tones year on year.
"As a consequence, there will be pressure to increase
exports," Sucden said.
On the demand side, imports by China "should falter" and
prove limited to 2.4m tonnes in 2014, down 40% year on year, after the country enlarged
stockpiles by 5m tonnes over the past two years.
"Overall, there remains a significant trade flow surplus
estimated at around 5m tonnes in December 2014," Sucden said.
"The surplus gives a 'structural' bearish tone to sugar
fundamentals in the coming 6-9 months," although much will depend on how the Centre
South cane crop turns out, and whether an El Nino, which often brings dryness
to India and excess rains to Brazil, begins later in the year.