The decline in sugar prices, which fell to a 20-month low, may
not have too much further to go, given the potential for weather concerns and a
switching by mills to producing ethanol.
New York raw sugar futures for July delivery touched 20.13
cents a pound on Wednesday, their lowest since September 2010, and taking nearly
to 18% their decline over the past month.
The drop has been attributed to improved hopes for supplies
from India, the second-ranked producer, and Thailand, the second biggest
exporter, besides the impact of a depreciating real on the industry in Brazil, by
far the largest sugar producer and shipper.
"The impact of the weaker real has been to reduce the impact
of the falling international dollar-denominated prices to Brazilian producers,"
"As such, we have seen a rise in forward hedging and origin
selling for dollar revenues."
'Downside will be
And the outlook in the short-term "appears more bearish than
bullish", Macquarie said, noting the pressure from extra Indian exports besides
the weakened technical picture.
The July contract below all major moving averages and in the
last session fell below the 20.40 cents-a-pound level, the 2011 low for a
near-term-contract, which had been expected to offer some resistance to
However, at about 18-19 cents a pound "further downside will
be limited" by the choice many Brazilian mills have to produce ethanol, rather
than sugar, from cane, and with the tipping point seen by many analysts at just
below current levels.
Furthermore, "additional price weakness will begin to hurt
some of the marginal cost producers – not just in Brazil but elsewhere" the
"Prices in India have risen lately, and although the 1m tonnes
of exports has been agreed, export margins will be poor for local mills."
At Standard Chartered, analyst Abah Ofon forecast a rebound
in prices, given the potential this year for another disappointing Brazilian
cane harvest, for which downgrades have already started, and a threat posed by
dry weather to Maharashtra, India's top sugar producing state.
While it was "still too early to be definitive" about the
outlook for India's monsoon season, which starts in June, "poor rains in India
can severely impact yields".
"According to some local industry reports, India's sugar
exports in the 2012-13 season could drop more than 30% year on year, due in
part to dry weather in key producing regions like Maharashtra."
Talk of the start of an El Nino weather pattern, which has
kicked off with the end of two years of La Nina, "could spook the market and
trigger panic demand should this weather risk crystallise", Mr Ofon added.
"On balance, we believe the decline in sugar prices will be
short-lived," he said, recommending long positions in October sugar, currently
trading at 20.76 cents a pound, "for an eventual rebound towards the 25-28-cents-a-pound
Separately, Commerzbank noted the strength of distant
contracts compared with forward ones, with the July 2013 contract, for instance,
trading at 21.79 cents a pound, a premium of nearly 1.5 cents to the July 2012
The smaller decline in further-away contracts compared with
near-term ones may be down to expectations of weaker growth ahead in Brazilian
"The International Sugar Organization only expects the sugar
cane crop in Brazil to grow by 3% a year between 2010 and 2020, as compared to
an annual growth rate of 10% between 2000 and 2010," Commerzbank noted.
The July 2012 lot closed at 20.38 cents a pound in New
York, up 0.1%.