Sugar Trending Higher But No Consensus On Outlook

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By Chris Shaw

Following weakness over much of 2007 sugar prices picked up in the December quarter, breaking through US12c per pound for the first time since the end of 2006. For Barclays Capital the price gains were the result of a number of factors, chief of which was an improvement in sentiment as the global sugar market’s balance turned more positive.

UBS also points to an increase in fund flows into agricultural commodities as a reason behind sugar’s recent strength, a view Barclays shared in noting speculative interest in the sugar market has turned long in recent months after having been net short in the September quarter.

While the two groups agree on this point they disagree on the outlook for sugar prices, with Barclays clearly the more bullish of the two. Its view is centred on the expectation the huge market surplus last year on the back of strong production growth won’t carry through 2008 given an expected slowing in output growth.

This anticipated tightening of the market will make sugar prices more susceptible to any disruptions to supply, Barclays pointing out this has already occurred this year with India indicating its output would be down by as much as 12% in 2008.

The group also suggests while the long speculative position is a risk for prices there should be enough news in the market to keep investors’ interest, especially as there are indications an increased proportion of Brazil’s output will be diverted to the ethanol industry.

Barclays also points out higher oil prices should support the ethanol industry generally, which in turn will support sugar prices. UBS though takes the view capacity constraints in the Brazilian ethanol industry will limit how much sugar will be diverted, so even allowing for disappointing Indian output there is scope for Brazilian production to offset this.

On the broker’s numbers it sees a market surplus of at least 10 million tonnes both this year and in 2009, which should keep a lid on prices. Its assessment is the market looks interesting at prices between US8-10c, but above US10.5c per pound India becomes a more willing seller into Asian markets in particular where it enjoys a freight advantage over the Brazilian producers.

As a result the broker suggests prices may peak around March or April this year, which is just prior to the start of the 2008 harvest in Central and South America.

Exposure to sugar via the Australian market is best achieved through either CSR ((CSR)) or Maryborough Sugar ((MSF)), though the former is less of a pure sugar play and so has additional risks.

The FNArena database shows CSR scoring two Buys and one Accumulate rating compared to four holds and two Sells, while Maryborough Sugar scores just one Buy rating from ABN Amro.

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