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Adecoagro upbeat on sugar price prospects, citing Brazil, El Nino

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Adecoagro, flagging the potential for a drop in Brazilian cane volumes, said it was upbeat on the prospects for a sugar price recovery – even as futures extended a recovery in New York.

Mariano Bosch, the chief executive of Adecoagro - the South American corn-to-milk producer whose major shareholders include celebrated investor George Soros - said that the group was "not worried in terms of sugar prices", despite a steep drop in values from November highs.

"We think that the fundamentals are still there, and we should expect better prices going forward with sugar prices," Mr Bosch told investors.

The group cited the potential for lower sugar cane production in Brazil's key Centre South region in the 2017-18 season, which started last month.

'Prices will be coming up'

Walter Sanchez, the Adecoagro chief commercial officer, flagged the prospect of a cane crush of 580m tonnes, down from the 607m-tonne volumes seen last season, according to the Unica industry group.

"If Brazil is coming up with a lower harvest… prices will be coming up from these levels," Mr Sanchez told investors.

Commentators have cited reasons from lower volumes of cane left over from the previous season to higher replanting rates, meaning significant crop too immature to harvest, for forecasts of declining processing volumes.

Unica itself foresees the crush this season at 585m tonnes.

El Nino factor

Mr Sanchez also highlighted the potential for a weaker figure El Nino, which tends to bring wetter conditions in the Centre South – as, indeed, observed in the early stages of the 2017-18 harvesting campaign – to cause extra pressure on volumes.

Viewing the potential for an El Nino at 50%, Mr Sanchez said that the weather pattern "will be affecting the production in most of the country".

"And I think that's another additional supposed item for prices" for the second half of the calendar year.

'Heavy enough to hamper harvesting'

The comments come even as sugar prices are staging some recovery from a one-year low of 15.12 cents a pound set last month on New York's futures market.

The spot July contract stood at 16.13 cents a pound in early deals on Wednesday, up 1.6% on the day, with further wetness viewed as offering support to prices.

"Weather forecasters have reiterated forecasts for some heavy rain across a large segment of southern Brazil's cane regions," said Tobin Gorey at Commonwealth Bank of Australia.

"The rain looks very likely to be heavy enough to hamper harvesting for a time."

'Pressure will build for short-covering rally'

However, he also flagged the role of a stronger real, which supports the value in dollar terms of assets, such as sugar, in which Brazil is a major player - while weighing on prices in the South American country itself, so deterring producer sales.

"The Brazilian real continues to rally, cutting the attractiveness" of domestic sugar sales, he said.

Meanwhile, the accumulation by speculators of a net short position in sugar of nearly 16,000 lots – down from a net long of more than 170,000 contracts three months ago – has raised ideas that this may provide ammunition for price gains, if holdings are closed.

"It seems the pressure will build for a short-covering rally in the short to medium term," said Tom Kujawa at Sucden Financial.

Ethanol vs sugar

Another factor in play among sugar investors is the so-called ethanol parity – the level at which it is equally appealing for Centre South mills to turn cane into the biofuel or sugar, and generally seen as equivalent to a sugar price a little below 15 cents a pound.

However, the figure does differ by region, and Mr Sanchez said that Adecoago was receiving a 9% premium for making anhydrous ethanol over sugar.

The group also revealed that it had slowed its hedging year on year – a strategy in line with expectations of higher prices ahead – having sold 367,500 tonnes of sugar forward for 2017-18 as of the end of March, equivalent to 58% of output.

A year ago, it had sold 420,980 tonnes of sugar forward, for 2016-17.

The price received so far for this season, at 19.2 cents a pound, is significantly ahead of the 14.1 cents a pound that Adecoagro locked in as of a year ago.

By Mike Verdin

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