Sugar price rally continues, despite ISO caution

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 38,576 contracts.

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 go?

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 place".

Prices will peak a level appealing to producers "who have actual sugar to sell", encouraging hedge funds with long positions to sell up too.

"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.

Price downgrade

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 be muted'

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.

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