Sugar prices may extend their decline for now, undermined by
seasonal factors, but will reward the long-term investor, Standard Chartered
said, voicing "deep concerns" about prospects for Brazil's cane harvest.
The bank forecast New York raw sugar futures averaging 17
cents a pound in the April-to-June quarter, a little lower than futures are
factoring in, forecasting that demand will prove constrained by consumers'
reliance on inventories built at cheaper prices.
Furthermore, the market is entering a seasonally-weak period
for prices, as Brazilian mills head into their cane crushing season, reducing
the need among buyers to compete for supplies.
"Sugar prices tend to be seasonally stronger between
mid-November and early March as Brazilian output dwindles," StanChart analyst
Abah Ofon said, echoing comments from Commonwealth Bank of Australia's Luke
Mr Mathews on Monday, saying that sugar prices "now appear
set to follow their typical seasonal sell-off", noted that futures have fallen
in March in each of the past seven years, with an average loss of 13%.
"Values have also declined in five of the past seven Aprils,
and five of the past seven Mays… in contrast to the months of January, June and
July whereby the sugar market has a tendency to rise," Mr Mathews said.
Raw sugar futures, which hit a four-month high of 18.47
cents a pound two weeks ago on concerns over the drought in Brazil's main cane
growing region, the Centre South, have since dropped nearly 8%.
However, StanChart recommended investors buy into sugar for March
2015 delivery - foreseeing the contract, which was trading at 18.42 cents a
pound on Tuesday hitting 22 cents a pound – highlighting the prospect for poor
Brazilian weather to dent cane yields, particularly in the key Centre South
state of Sao Paolo.
Forecasts for world sugar production surplus in 2014-15
Louis Dreyfus: 5m tonnes, (October-September year)
Kingsman: 2.1m tonnes, (October-September year)
Green Pool: 1.6m tonnes, (October-September year)
Standard Chartered: -1.0m tonnes, (year not stated)
Macquarie: -1.2m tonnes, (October-September year)
Datagro: -1.2m tonnes, (year not known)
FO Licht: "the market could end up in deficit again" (October-September year)
Sources: ISO, Agrimoney.com. Some analysts use an April-March crop year
"We recall that extreme temperatures in the first quarter and
four quarter of 2012 led to a 10% reduction in cane yields, with yields ending
the year at 71.6 tonnes a hectare, down from 78.9 tonnes a hectare in January,"
Mr Ofon said.
Furthermore, even at current sugar prices, well above levels
below 15 cents a pound reached in January, it is more profitable for mills to
turn cane into ethanol rather than the sweetener.
Besides "high imported energy costs and firm ethanol demand"
sources "cite high debt servicing, energy and logistics costs, and a rigid
labour and regulatory environment as reasons for tight-to-negative margins in
sugar production", Mr Ofon said.
El Nino threat?
The bank, forecasting a world production deficit of 1.0m
tonnes in world sugar output in 2014-15, highlighted the threat to supplies
from potential dryness in India too, if El Nino strikes.
"With [Indian] consumption and production evenly balanced at
around 23.5m tonnes in 2013-14," and the country's inventories having been drained
by measures to boost exports, "we believe that any weather-induced supply
deficit in the coming season will be price-supportive", Mr Ofon said.
"We recall that El Niño weather conditions adversely affected
India's monsoon season in 2009, with output falling by over 40% and triggering
a bull run in sugar prices."
The bank forecast prices averaging 20 cents a pound in the
second half of 2014 and 24 cents a pound in 2015.
Surplus or deficit?
The comments come amid some debate over the extent of the
damage to Brazil's cane crop from drought, and the potential for the world returning
to a production deficit in 2014-15, for the first time in four years.
Analysts including Australia-based Green Pool, Louis Dreyfus
Commodities and Kingsman have forecast a surplus, with Datagro, FO Licht and
Macquarie foreseeing a deficit.
London broker Marex on Monday took a different view of the
potential for El Nino to dent Indian sugar production prospects, saying that
the country's slump in output in 2009-10 was "mainly" due to financial
factors, and a switch away from cane by farmers, amid a high level of payment
arrears from mills.
"Anyway, water levels in India are 30% higher than one
year ago, due to last year's above-average monsoon and subsequent rains,"
Mr Ofon said that India's sugar sector "continues to suffer
from water shortages, cane arrears and a dynamic regulatory environment".