Investors 'overly complacent' about cheap sugar


Australia & New Zealand Bank has waded into a debate on sugar prices by warning that investors may be being overly complacent on expectations of low values, given a likely slowdown in the pace of output.

Sugar prices have attracted a barrage of comment since hitting a three-year low of 15.93 cents a pound last week, with the likes of Goldman Sachs and Rabobank cutting price forecasts, but ABN Amro saying prices have "bottomed out".

ANZ waded in on the bullish side, warning that while "complacency on sugar prices appears to be the order of the day, [it] is bordering on overdone".

Sugar prices, in the physical market at least, "should find better support in the second half of 2013".

Comparison with last year

The bank said that its "key concern" was that mills had already worked their way through most of the extra cane that was expected to be harvested in 2013-14, implying a limit to the increase in sugar output for the rest of the season.

An extra 53m tonnes of cane has been processed so far in Brazil's Centre South district, responsible for some 90% of the country's sugar output, not far short of a forecast from industry group Unica of an extra 60m tonnes to be processed in the whole season.

"This leaves crush volumes for the remainder of the season to follow a similar path to 2012 in Brazil's Centre South," ANZ senior ag economist Paul Deane said.

With levels of sugar in cane similar to last year, the total level of sugars available from cane from August to December looks in line with last year.

'Untenable outcome'

Yet of these sugars, an increased proportion is being turned into ethanol rather than sweeteners, with the percentage turned into the biofuel at 47.5% so far this season, which started in April, compared with 52% a year ago.

"If the current low conversion rates of cane into sugar were to continue for the remaining 320m tonnes of cane left to be processed, raw sugar output falls 2.5m tonnes below levels processed between August and December 2012," Mr Deane said.

However, this outcome appeared "untenable", and would require a rise in sugar prices to stimulate production of the sweetener compared with ethanol.

Cash vs futures

"We view physical dollar-denominated sugar prices as funding support at these levels, with the balance of risks shifting more to a greater chance of modest gains rather than another leg lower," he said.

However, "whether this translates into higher New York futures prices remains to be seen, given basis levels are low.

"Any improvement in sentiment may merely be reflected in higher physical prices."

October raw sugar futures stood 0.1% higher at 16.41 cents a pound in New York at 05:45 local time (10.45 UK time).