The International Sugar Organization countered expectations
of rising sugar prices long-term, even as futures hit a fresh two-month high,
bolstered by concerns over the "persistent rainfall deficit" in Brazil.
Raw sugar futures for May, New York's best-traded contract,
hit 16.95 cents a pound on Friday, the highest for a nearest-but-one contract
since early December, before easing back to stand at 16.58 cents a pound in
late deals, up 1.5% on the day.
The rise was fuelled by continued fears over the damage to cane
production prospects in Brazil's key Centre South region from a dearth of rain,
with buying pressure fuelled by a scramble by hedge funds to cover their large
bets on price falls in the sweetener.
As of Tuesday last
week, speculators held a net short in New York raw sugar futures and options of
While hedge funds have closed many of their short positions
have been closed, "we still believe there are shorts still to be covered", said
Nick Penney, senior trader at Sucden Financial.
How high will prices
Indeed, the broker took a relatively upbeat view of price
prospects say that "whilst weather concerns are taking front stage, we feel the
market still has legs on the upside", Mr Penney said.
Although fears of crop damage may prove exaggerated, "as new
downgraded estimates come out, further short covering and new buying will take
Prices will peak a level appealing to producers "who have
actual sugar to sell", encouraging hedge funds with long positions to sell up
"At what level that will be is anyone's guess, but as values
go to cost of production levels, millers will take a long hard look at demand
and perhaps take advantage of a reprieve" from prices which dropped below 15
cents a pound last month.
Macquarie earlier this week estimated sugar output costs in
Brazil, the top sugar producer and exporter, at 17-19 cents a pound, with India
and European figures even higher, although some Asia Pacific, Australian and
South African mills were achieving lower costs.
The comments as Rabobank joined the banks cutting forecasts
for the cane crop in Brazil's Centre South, albeit by a modest 5m tonnes from
an estimate of 600m tonnes released earlier this weeks.
"The persistent rainfall deficit across much of the Centre
South of Brazil's cane-growing heartland is diving production concerns for the
upcoming crop," the bank said.
Nonetheless, it actually cut its estimate for average raw sugar
futures prices this quarter by 1.2 cents a pound to 16.0 cents a pound, and by
1.0 cents a pound to 18.0 cents a pound for the April-to-June period.
Despite the "short-term support" to prices from weather
risks, the large build-up in stocks over four successive seasons of production
surplus will limit upside for prices.
Indeed, India's decision last week to introduce an export
subsidy for up to 4m tonnes of raw sugar over this season and next "could
increase the exportable supplies of sugar and weigh on prices throughout 2014".
'Little support for values'
The International Sugar Organization said that Indian sugar
output might not suffer in 2014-15 a cyclical decline despite the traditional
driver of a downturn, large arrears of payments by cane mills to growers.
Rabobank raw sugar price forecasts and (change on previous)
Q1 2014: 16.0 cents a pound, (-1.2 cents a pound)
Q2 2014: 17.0 cents a pound, (-1.0 cents a pound)
Q3 2014: 18.2 cents a pound, (unchanged)
Q4 2014: 18.8 cents a pound, (unchanged)
Quarter average price for front month New York contract
With falling prices of other crops making cane more
attractive, and the government allowing mills to phase in higher cane payments
over 2014, "it is unclear if 2014-15 will see cane farmers leaving the sugar
sector en masse", the intergovernmental group said.
Furthermore, the export subsidy, at the equivalent of $54
per tonne of raw sugar, had been "explicitly approved with the mandate of
allowing millers to clear payment of arrears to the fullest possible extent", arrears
which are currently at a record high of nearly $2bn.
With supplies strong - the ISO estimated the stocks-to-use
ratio for sugar potentially rising to a six-year high of 44% this season – "global
fundamentals per se provide little support for market values" for the rest of 2013-14.
'Price recovery might
And looking further ahead, "crucially, even if and when the
world sugar economy enters a deficit phase, a possible price recovery might be
muted by the huge stocks accumulated since the beginning of the surplus phase
in 2010-11," the ISO said.
The comments came as the organisation trimmed by 517,000
tonnes to 4.213m tonnes its forecast for the world sugar surplus this season.
The ISO uses an October-to-September market year, unlike
most other commentators, who use an April-to-March year which ties in with the
Brazilian cane crushing season.