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Sugar futures to extend fall - cotton a better bet

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The slide in sugar prices should take futures to about 16.00 cents a pound for the first time in three years thanks to the weight of global supplies, Macquarie said, sounding bearish notes too for cocoa and arabica coffee – but less so for cotton.

Data due on Wednesday from Unica, the Brazilian cane industry group, may offer sugar bulls some comfort in showing a fallback in the cane crush in the country's key Centre South region late last month, thanks to rain disruptions.

But drier weather is due to return "from this week onwards", adding to the bearish pressures including a timely start to India's monsoon, and better-than-expected production from the likes of Mexico and Thailand.

Furthermore, Brazil's mills have been turning more cane to sugar, rather than ethanol, than many investors had expected given the relatively high rewards from making the biofuel compared with the sweetener.

Mills' decision to sick with sugar "is more to do with pre-committed sugar supply agreements with mills, as opposed to sugar being more remunerative than ethanol, which has certainly not been the case", Macquarie analyst Kona Haque said.

Last week Cosan, Brazil's biggest sugar and ethanol group, also highlighted the limits to mills' technical ability to switch cane processing options.

'Sugar will touch 16 cents'

"Futures are continuing to plummet, and with less than 50% of the Brazilian harvest to date having gone to ethanol since the crush started, there is no shortage of supplies in the world right now," Ms Haque said.

"It now seems likely that sugar will touch 16 cents a pound in the short term," a level not seen in a front contract in New York since July 2010, and below the 16.43 cents a pound at which the front July futures contract was trading at on Monday.

However, Macquarie stuck by a view that prices will "trough" in the July-to-September quarter as Brazilian mills become better able to exploit the relatively high rewards from producing ethanol.

"Bargain hunting from Middle East, North Africa and Asian markets" will also support futures.

Arabica vs robusta

The bank also struck a bearish note on arabica coffee futures, also trading near three-year lows, saying that despite the outbreak of roya fungus in Central America, "it is clear that at least in the current season, we have no shortage globally.

"Colombia's exports have risen 22% year on year in the 12 months through April 2013, while the collective exports out of Central America and other arabica producers rose 5% during the October-to-April period."

Although arabica beans have rebuilt their premium over London-traded robusta beans to $43 a tonne, "traders may look to fade this again down to the $35-a-tonne level we saw in March", Ms Haque said.

'Expect a retracement'

And Macquarie sounded a cautious note on cocoa futures too, saying that even though there had been some concerns over bean quality from the West African mid-crop, with the harvest under way, and "and arrivals slowly coming through, we are not convinced that the current rally is fundamentally justified".

Margins for processors are "still not optimal", with returns from cocoa butter improving, but remaining "disappointing" on cocoa powder, the other main product of crushing beans.

"We expect a short-term retracement," Ms Haque said, if adding that further ahead "we still think cocoa fundamentals are on the whole, constructive.

"From the late July-to-September quarter onwards, we see prices edging up again towards $2,400-2,500 a tonne."

'Import arbitrage is open'

However, the bank was more upbeat on prospects for cotton, old crop futures especially, given the squeeze on supplies in the US, the top exporter, where the prospect for the 2013 crop faces setbacks from dryness and a drop in plantings.

"We still like the fundamentals of old crop cotton," Ms Haque said.

"With risks to the US new crop currently high due to lower acres and continued dryness in Texas, reliance on US old crop will be extended."

And this at a time when the high prices in China, thanks to a farm support programme which officials acknowledged last week had led to unforeseen setbacks, are encouraging the country's mills to import.

"The import arbitrage with 40% duty is open," with cotton prices at current levels.

Demand for cotton was also strong from "countries that are enjoying surging exports of cotton yarn to China", thanks to the high-price regime that China's own mills are operating at.


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