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 Mathews.
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. Array
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
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.
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.
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," Marex said.
Mr Ofon said that India's sugar sector "continues to suffer from water shortages, cane arrears and a dynamic regulatory environment".