Commodities | Oct 07 2006
By Chris Shaw
Falls in gold and oil have caught most of the market’s attention in recent weeks but even larger in percentage terms has been the decline in the sugar price, which has all but halved from US20c per pound earlier in the year to around US11c now.
In Citicorp’s view a number of factors explain the price fall in recent months, starting with a rush by European Union (EU) producers to export given the change in subsidies specified by the World Trade Organisation (WTO). At the same time as EU producers were selling the Brazilian and South American harvests were being done faster than expected, meaning there was more sugar in the market.
This created a weak outlook for sugar prices globally, meaning funds that were long began switching out of their positions, further weakening prices. To cap things off ethanol prices have been trending down recently, so there have been few positives in the sugar market in recent months.
But conditions are set to change in coming months, so the broker sees an opportunity for investors with a medium-term time frame. It expects little change before the end of the year while the South American harvest is completed, but suggests once that is out of the way the market’s fundamentals will improve. Helping is the fact EU exports have been removed from the market, which takes as much as 5.5 million tonnes of white sugar out of circulation.
Recent weakness in prices has not been consistent, the broker noting the spread between white and raw sugar prices has actually widened of late. In its view this should support the price of raw sugar, as will higher demand for raw sugar from refiners given the removal of the EU’s white sugar exports.
The level of fund positions in the sugar market may also begin to work the other way, as open interest has fallen from around 160,000 contracts last October to around 25,000 contracts now on the broker’s numbers, It sees this as being an oversold position, particularly as while the market has moved from deficit into surplus the surplus is expected to only be in the order of 1.5 million tonnes next year.
As well, just as El Nino has impacted on wheat crops in Australia and Argentina there is the potential for it to also hit sugar crops, so the broker suggests there is downside risk to supply.
The demand side is also likely to get a boost from the ethanol market, as with sugar prices below ethanol prices again there has been a switch back to ethanol production at the same time as ethanol demand is likely to increase given the current lower price, an outcome that again would help push up sugar prices in coming months.