Brazil frost boosts sugar price hopes - a little


The frost scare which has put a question mark over 65m tonnes of Brazilian cane has lifted prospects for sugar prices - but not by that much, given the extent of the world surplus in the sweetener.

 Datagro surprised investors on Wednesday by estimating that cane equivalent to about 18% of crop left uncut, was damaged by frosts which touched states including Parana, Mato Grosso do Sul and Sao Paulo last week.

While it would be another week until a full assessment could be made, it was already apparent that the freeze, beyond reducing cane for crushing this season, will stem production in 2014-15 too, having damaged some young, ratoon cane, which will require replanting the consultancy said.

"If the damage is truly severe as feared, we can expect a lower output for this harvest and the next," Joyce Liu at broker Phillip Futures said.

Commentators have already been trimming expectations for the Brazil Centre South cane crop this season, with persistent rumours that Unica, the influential cane industry group, is poised to downgrade its forecast of 589.6m tonnes.

'Wary of getting optimistic'

However, sugar prices, which were sent by the Datagro comments above 17.00 cents a pound for the first time in a month, retreated on Thursday, amid doubts over the dent to Centre South sugar output will reduce buyers' market power much, given a third successive world  production surplus in 2013-14.

Commerzbank noted that, following the freeze, "correspondingly less sugar is likely to be produced, especially since there is an incentive for sugar mills to produce more ethanol.

But "in view of the still significant global supply surplus, the upside potential for the sugar prices is limited".

The comments were echoed by Sucden Financial, which said that it was "wary of getting overly-optimistic on prices on the strength of these early frost damage reports.

"It may be the case that the market range has now shifted up half a cent to 17.50-16.50 cents a pound instead of 16-17 cents a pound," Sucden senior trader Nick Penney said.

'Suffered some pain'

Nonetheless, both commentators acknowledge the potential for unusual price moves should hedge funds be persuaded to cover some of their significant bets on falling prices.

As of July 23, speculators were net short on New York raw sugar futures and options by more than 60,000 contracts, a historically high figure.

"We recognise that holders of short positions at lower levels have suffered some pain," Mr Penney said.

"It may be that there is more covering to come and more insurance to be bought in the form of call options."

Real tumble

Another factor which sugar markets are monitoring, as are investors in other agricultural commodities such as arabica coffee and orange juice in which Brazil is a major player, are moves in the Brazilian currency.

The dollar on Wednesday briefly rose above R$2.30 for the first time in four years, extending a decline which has made the real the worst-performing emerging market currency this year falling more than 12% so far.

The real, which has been undermined by Brazil's softening economy and deteriorating national budget, recovered a little ground after the country's central bank sold 30,000 currency swaps to ease a shortage of dollars.

A weaker real, which on Thursday stood at R$2.2914 per $1, undermines the value in dollars of assets of which Brazilian is a major exporter.