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Will sugar prices extend their recovery in 2020?

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Sugar futures rose in New York in 2019 by 11.6%, the first gain in three years, amid ideas of an end to successive years of world production surplus.

 

A global output deficit is broadly expected in 2019-20, with some commentators pegging the shortfall above 7m tonnes, as strong ethanol prices keep Brazilian mills maximising output of the biofuel, rather than sugar, from cane.

 

Still, there remains plenty of sugar left over in the world from the surplus period – notably in India, which has offered subsidies for exports, incurring the wrath of rival shipping countries.

 

Will the overhang keep sugar prices in check? Or will Brazilian output, and Indian exports, remain curtailed to add buoyancy to the market?

 

Leading commentators give their views.

 

The article below has been updated with Marex Spectron comments.

 

 

ABN Amro

Bullish sentiment in sugar persists as the market will swing into deficit in 2019-20.

 

This will underpin prices.

 

However, the risk of an increase in Indian exports hangs over the market. Accumulated stocks in India over the past months will keep price gains muted.

 

 

 

Commerzbank

The International Sugar Organization is anticipating a deficit not only in the current season, however: in its first outlook for 2020-21, it predicts another deficit of 3.5m tonnes.

 

If this comes to pass, the rise in global reserves that resulted from the surpluses in 2017-18 and 2018-19 would be eliminated almost entirely again.

 

The prolonged deficit phase should lend buoyancy to the sugar price.

 

High Indian reserves, which could result in exports to the global market, are likely to dampen any upswing, however – as is the weak Brazilian real.

 

However, the prospect of a second deficit in succession should give the sugar price a boost.

 

We therefore predict a raw sugar price in New York of 15 cents per pound at the end of 2020.

 

FocusEconomics

The price of sugar rose in recent weeks on the back of the International Sugar Organization’s November forecasts showing tighter supply than previously expected over 2019-20.

 

Going forward, prices are forecast to rise in 2020 on weak production in the US and Thailand.

 

Our panellists expect prices to average 13.2 cents per pound in the fourth quarter of 2020 and 13.8 cents per pound in the fourth quarter of 2021.

 

 

Goldman Sachs

We are broadly bullish across the softs complex, as years of bearish productivity increases and foreign exchange-led cost deflation look to wane in 2020.

 

The Indian monsoon is expected to pull total sugar production down to 26.9m tonnes, down 17.2% year on year, and the world into a global deficit for the first time in four years.

 

 

International Sugar Organization

 

A larger-than-initially-expected global deficit indicates a fundamental move towards a reduction in global stocks still overhanging the market.

 

The ending stocks:consumption ratio is forecast to reduce from nearly 55% to 50.5%. If realised this would be the lowest since 2016-17 but still seemingly not low enough to trigger an improvement in world market values above 15 cents a pound.

 

[As regards] preliminary thoughts on the market fundamentals in 2020-21… In a nutshell, putting together possible changes in production and projected consumption growth, a more modest but still significant global deficit of 3.5m tonnes looms on the horizon, heralding the continuation of the deficit phase in the world sugar cycle.

 

 

JP Morgan

ICE sugar remains our most bullish call through 2020, as a structural decline in available sucrose supply for sugar production will drive the world balance into a consecutive season of deficit through 2020-21.

 

With declining area planted to cane and beet, and rising world ethanol demand, the shadow price of sugar is set to rise, providing support for ICE sugar over the medium term.

 

2020 [price] projections are held firm at an average of 14.8 cents per pound, finishing the year at 15.5 cents per pound.

 

Fundamentally, the world balance remains in a modest deficit of 7.3m tonnes through 2019-20, albeit slightly deeper than our prior 6.4m-tonne estimate.

 

Our preliminary expectation for 2020-21 is for a further decline in global stocks, as a deficit of at least 8m tonnes evolves. Our bias is for a deeper 2020-21 deficit, in the event that Brazil’s ethanol sector buys more cane than expected through the 2020 campaign.

 

However, the projected increase in cane area in India also needs to be monitored closely – as this could be an offsetting factor.

 

 

Marex Spectron

 

This being the season when people make serious and silly predictions about the coming year – here goes.

 

The flat price next year will track the ethanol parity even more closely than last year. Obvious, because we almost certainly need a bit of “extra” sugar out of Centre South Brazil, so have to stay closer to the parity.

 

Nobody can predict the forward ethanol parity for summer 2020, but most of us assume that it is likely to end up around 13.50 cents a pound…. based on models of probable forward prices for ethanol in Brazil.

 

The sugar market will continue with a bearish bias. We say this because in sugar, and to a lesser extent in other commodities like coffee, “producers always sell forward, and consumers never buy forward”.

 

Certainly, at present, the producers are well priced (sold) and we know of almost no major industrial consumers who have bought their forward requirements.

 

The result is that the spec community have to carry a long position equal to the producers’ short position. Therefore, the price of sugar has always to be at a discount to “fair value” in order to induce the spec community to carry this long.

 

This may be one explanation of why sugar’s default position seems to be to decline when nothing is going on.

 

 

Rabobank

In our base case, we assume a more or less balanced global market in 2020-21, following the 2019-20 deficit.

 

We expect largest producer India to see a significant recovery. This recovery should be possible due to the high availability of water in reservoirs following heavy rains in September and October 2019.

 

With this in mind, any potential global deficit in 2020-21 will likely be smaller than in 2019-20.

 

After a surge in investments in ethanol plants in Mato Grosso, Brazil is expected to produce over 2bn litres of corn ethanol by 2020-21, from 1.4bn litres in 2019-20.

 

This may slightly lower the demand growth for cane ethanol in certain regions, but the fundamental Brazilian ethanol demand drivers are likely to be a potential economic recovery in 2020 and oil prices.

 

Ethanol is likely to be very competitive – and in case any more sugar is needed out of Brazil, sugar prices will face a quick upside in order to convince mills out of ethanol maximisation.

 

 

Felipe Vicchiato, chief financial officer, Sao Martinho

We do not believe that the sugar price has a lot of room to grow very quickly.

 

For the next year, there should be a deficit of sugar in the market.

 

But on the other hand, the inventories are still high, mainly in the northern hemisphere where you have the biggest consumer market.

 

We understand that this is a limiting factor to see a price recovery.

 

The last figure I saw about India is that the expectation is that India could be reducing sugar production, getting to 28m tonnes on average, according to analysts, but this reduction will not be relevant enough for a recovery of the sugar prices because the inventories are very high.

 

But if Brazil has another harvest more towards ethanol for next year, then we would be producing 10m tonnes less than the potential for sugar… [which] would bring or start balancing the inventory volumes of sugar in the world.

 

May and July [futures] 2020, we do not see an upside [for prices]. But maybe for October, et cetera, there might be a recovery because of this dynamic.

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