The outlook for sugar prices may not be as dismal as some investors have suggested thanks to enhanced competition with ethanol for cane – although it may take some time for support to feed through.
Rabobank on Friday became the latest in a series of groups to lift its estimate for the world sugar production in surplus in 2012-13, raising its forecast by 1.4m tonnes to 6.6m tonnes.
Czarnikow on Wednesday raised its forecast for the surplus by 700,000 tonnes to 7.8m tonnes, while Swiss-based Kingsman earlier this month raised its estimate by 2.5m tonnes to 9.2m tonnes.
"Modest downward revisions to production projections in countries such as India, Thailand and Russia in recent weeks have been offset by upward revisions to projections for Brazil, Mexico and others," Rabobank analyst Andy Duff said.
The bank, which had previously forecast the cane crush in Brazil's key Centre South region in 2012-13 at 510m tonnes, flagged consensus thinking now of a harvest of more than 520m tonnes, leading to sugar production of 33.3m tonnes, a rise of 6%.
Centre South ethanol output was pegged at 20.8bn litres, a 1% increase year on year.
The Centre South cane crush looked set to rise further in 2013-14, with the bank pencilling in a harvest of 540m-580m tonnes.
"In addition to the efforts made by mills to boost the replanting of cane, the abnormal rains during May and June that hampered the early stage of the season's harvest have boosted the development of the crop that will be harvested in 2013," Mr Duff said.
However, this did not necessarily mean a rise in sugar output from the Centre South, responsible for nearly 90% of Brazil's production of the sweetener.
The "big question" for the sugar market in 2013-14 "concerns the sugar and ethanol production mix", and what proportion of cane mills devote to each product.
"Unlike the previous years, when the incentive to maximise sugar production was clear, in 2013-14 the scenario could be different," Mr Duff said.
"Lower world market sugar prices, robust export flows of ethanol to the US and a growing belief that the Brazilian government may increase gasoline prices in 2013 all suggest that the relative attractiveness of ethanol versus sugar could change."
Already, in a late-2012 period "that has been rather quiet in terms of fundamental news, one event that stands out is the breaching of the ethanol floor by New York futures on December 10, when by our calculations sugar prices slipped below the anhydrous ethanol equivalent price".
New York's spot raw sugar lot on that day fell below 19 cents a pound for only the sixth time in 2012, at a time of relatively firm ethanol prices.
However, the impact of this dynamic in supporting sugar prices may be delayed, given that the Centre South cane harvest is nearly over, limiting the opportunities for mills to switch cane allocation.
When the harvest ends, "the sugar-ethanol arbitrage disappears", Mr Duff said.
"The region's available sugar is in warehouses, and the region's available ethanol is in tanks.
"The short-term support that ethanol prices can provide for the sugar price is negligible.
"However, it is possible that the production and sales decisions for the new crop, eg increased forward selling of ethanol for export, could impact perceptions of Centre South sugar output and availability in early-mid 2013."