Sugar futures present modest chances for price gains, Goldman Sachs and Rabobank concurred, although neither foresaw runaway gains from present levels, which are deemed by many investors as close to ethanol parity.
Goldman Sachs said it saw “further upside risk to sugar prices”, stemming from both the potential for a gain the Brazilian real, which boosts the dollar value of assets in which the country is a big player, and for weather upsets.
“Adverse weather conditions continue to be of some concern,” the bank said.
“In India, for example, prevailing El Nino conditions have historically led to lower rainfalls and a delayed monsoon.”
Goldman said that “given these developments, we maintain our moderately bullish stance” on sugar futures, for which it saw New York spot futures prices averaging 13 cents a pound in both three-, six- and 12-month time horizons.
That said, while the three-month forecast is ahead of the futures curve, that for six months is roughly in line, while that for 12 months is behind the 13.82 cents a pound July 2020 futures are trading at.
‘Huge rundown in stocks’
Rabobank said that by the end of 2019, “we expect fundamentals to push the international price to around 13.6 cents a pound”, above the futures curve.
The forecast reflected expectations of a 4.2m-tonne world production deficit in 2019-20, following a modest 0.6m-tonne surplus this season, although following a 9m-tonne surplus in 2017-18.
The outlook “signifies a huge rundown in stocks”, said Charles Clack, Rabobank sugar analyst.
“While global stocks will continue to weigh heavily on the market for a few more months yet, the market will start to come back into balance as we approach the end of the year.”
While saying that the balance sheet “doesn’t mean we will see a strong jump in sugar prices… with the global sugar market set to run up a deficit next season, there is certainly some upside to the price outlook”.
‘Continued to tighten’
Rabobank too noted some weather worries, including a dearth of rains in China and Thailand, as well as in India, where output was forecast falling by more than 4m tonnes to 31.8m tonnes in 2019-20 “as dryness threatens output.
The monsoon “will be eagerly awaited”, the bank said, noting that the key cane-growing state of Maharashtra was “particularly at risk [from dryness], with dam levels of 10%, versus 22% last year”.
In the European Union, the bank forecast output at 18.4m tonnes, based on ideas of a 6% drop in beet area year on year, but a 12% recovery in yields from last year’s dryness-reduced levels.
“The EU’s supply-demand balance has continued to tighten, and spot prices are reported to be trading at over E450 a tonne on a delivery basis,” the bank said.
The European Commission reported the sugar price in its latest report, covering March, at E314 a tonne, although standing at E365 a tonne in the south of the bloc.
Sugar vs ethanol
For Brazil, Rabobank forecast a cane crush of 575m tonnes in the key Centre South region, and sugar output of some 27m tonnes.
However, it highlighted that there was potential to produce more of the sweetener if prices encouraged mills to turn cane into sugar rather than ethanol.
“This sugar-ethanol arbitrage continues to favour ethanol, but the gap is narrowing.”
Separately, Marex Spectron analyst Robin Shaw said that fund buying had “pushed [sugar] prices back to close to the ethanol parity.
“Obviously if the sugar price is sustained above that parity for any length of time, mills in Brazil will switch to making more sugar/less ethanol.”
Mr Shaw also highlighted as “the slow and late start to the Indian monsoon, which we think will be below average in the key areas of Uttar Pradesh and Maharashtra”.