Commodities | Oct 01 2009
By Andrew Nelson
You’d almost have to have been living under a rock if you haven’t read at least something about sugar over the last few months.
Normally seen as one of the duller commodities, sugar has attracted a lot of attention lately. While some might feel the increased profile has developed into an overblown investment case, commodities analysts at Barclays Capital think there’s plenty of upside left in the sweetest commodity.
The team at Barclays likens it to “a perfect storm”, with the data out of both India and Brazil looking “irrepressibly bullish”. India had a really poor harvest in 2008-09, mostly because of inadequate Monsoon rains. But the market was also burdened by some severe distortions in the cane pricing mechanism and competition from strong gur prices. Gur, or jaggery is a traditional unrefined non-centrifugal sugar consumed in Asia and other developing regions of the world.
The current 2009-10 Indian crop is if anything, looking even worse. Crops are suffering at the hands of an even drier Monsoon season, which Barclays advises is the worst for several decades. Coupled with the poor harvest last year, the Indian market has been pouring out a continuous stream of reduced output estimates.
There were hopes that Brazil would be able to offer some support to the ever increasing tightness falling Indian production was placing on the sugar market, but it’s not panning out that way. As while Brazilian production is up close to 12% in year on year terms, poor weather conditions in both June and July this year are casting some serious doubt on how much help that country’s sugar output will be able to offer.
The poor weather means an increasing number of available crushing days are fruitless, while the overall sucrose content of the delivered crop is also lower than normal. This has seen the team at Barclays cut its latest Brazilian crop estimate by 2Mt.
Barclays also notes the apparent emergence of a sugar shortage in the US, while there is also evidence of sustained increased demand in both Russia and China. This leads the broker to think that on the demand side, the v-shaped recovery in the global economy that many are now predicting will provide further upward pressure for sugar prices.
Add all of this together and Barclays expects sugar prices will average US22c/lb in Q409, increasing to US24.5c/lb in H110, with the team thinking the strength of current fundamentals will begin to significantly override what are currently ” indifferent signals” arising from recent price moves.
While the tight supply environment looks sure to continue over the next few quarters, the next obvious question must be: how long will these dynamics actually remain in play?
Barclays doesn’t believe the aforementioned difficulties the sugar industry is currently undergoing will lead to a permanent structural loss of production in India or other major producing countries.
Instead, the bank sees current market dynamics as simply an unfortunate and low probability confluence of circumstances on the supply side, which it thinks will have unwound themselves by 2011. However, Barclays notes that higher prices in almost all agricultural markets tend to send a positive output signal to the supply side. But as it takes 12-18 months for a sugar crop to mature, any assumption of a bumper 2010-11 crop may be a bit premature at this point.
And in India especially, the current weakness in stock levels will support prices for a while to come yet. Especially when factoring in higher oil prices and moderate support from the demand side on the back of the recovery in the global economy. Even if significantly increased production from next year onwards translates into price declines, Barclays thinks they will be moderate. As such, the bank predicts the average sugar price in H210 will still be around be US21c/lb.
