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Biosev slows sugar hedging, seeing 'positive' price prospects

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Biosev, the world's second-largest sugar producer, unveiled an upbeat forecast for prices of the sweetener, viewing as "short term" the market fluctuations in futures - which set a fresh 15-month low.

Brazil-based Biosev, which is controlled by agricultural trading giant Louis Dreyfus, said that recent sugar price weakness was a reflection of both the weak level of world inventories, which encourages price swings, and hedge fund selling, which has given such volatility a negative slant.

"Changes in the positions of speculative funds… have affected sugar prices in recent months," said Rui Chammas, the Biosev chief executive.

Managed money as of Tuesday last week had built up a net short of 8,718 contracts in New York raw sugar futures and options, compared with a net long position of some 150,000 lots at the start of the year, according to regulatory data, which will be updated later on Friday.

'Positive price outlook'

However, Mr Chammas said that this weight on prices - which in New York hit 13.77 cents a pound on Friday for July delivery, the lowest for a spot contract since February last year – represented only a "short-term dynamic.

"Business fundamentals will prevail over time," he said, in a report which revealed that Biosev had slowed forward sales of sugar, a strategy consistent with expectations of a price recovery.

"In our opinion, the outlook for sugar prices in the coming crop year [2017-18] remains positive," a factor which could see it raise the proportion of cane turned into sweetener, rather than ethanol, from the 50.7% reported in the year to March.

This was in turn above the 45.9% of cane turned into sugar in 2015-16.

Price outlooks

The comments tally with those on Thursday from the International Sugar Organization which, raising to a "massive" 6.8m tonnes its forecast for the drop in world sugar stocks over 2016-17, cautioned against overestimating the pressure on prices from an expected return to a global output surplus next season.

However, Commerzbank on Friday flagged a dent to sugar price prospects also from weakness in oil prices which, in undermining ethanol prices, undermines the value that sugar needs to reach to win its share of the Brazilian cane harvest.

"What is more, the fact that the Brazilian real has been noticeably weaker since mid-May makes sugar exports more attractive," Commerzbank said, a positive dynamic for production and, in turn, potential hit to price prospects.

Societe Generale, slashing its forecast for sugar prices, cautioned that a "further decline in oil prices could pull the sugar-ethanol parity floor," the level at which the biofuel and sweetener offer equal rewards for cane mills, "down from the current estimate of about 13.5 cents a pound" in sugar terms.

Sucden Financial flagged an "impression that… it will take either a major weather or political event to stem the haemorrhage in [sugar] values", given the looming return to a global production surplus.

Hedging slowdown

Biosev's comments came as it unveiled results showing a R$313.4m loss for the January-to-March period, compared with earnings of R$22.3m a year before.

While revenues soared 19.4% to R$1.73bn, costs rose even faster, thanks to raised cane prices, increasing buy-ins of cane, and higher logistical bills.

The report showed that Biosev had, as of the end of March, sold forward 60% of its forecast 2017-18 sugar production, compared with a figure of 74% of 2016-17 output a year before.

However, it achieved far higher prices, averaging 18.52 cents a pound for this season, compared with the 13.73 cents a pound it had locked in a year before.

Biosev shares stood 3.5% lower at R$5.76 in lunchtime deals in Sao Paulo.

Raw sugar futures for July stood at 13.83 cents a pound in New York, down 1.3% on the day.

By Mike Verdin

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