ABN cuts sugar price forecast, even as futures rally

14.04.2017

ABN Amro raised doubts over a recovery in sugar prices, cutting its forecast for values to a level well below the futures curve, even as prices of the sweetener attempted a firm close to the trading week.

The bank slashed by up to 4 cents its forecast for New York-traded raw sugar futures, which it now saw ending the April-to-June quarter at 16 cents a pound, nearly 1 cent below the level investors are factoring in.

The estimate for prices at the close of 2017 was trimmed by 1 cent to 16 cents a pound, compared with a level of 17.53 cents a pound being priced in by the March 2018 contract on Thursday.

The downgrade came even as sugar prices jumped, adding 2.0% to 17.04 cents a pound for May delivery, with the contract cross above its 20-day moving average for the first time in nearly two months.

The better-traded July raw sugar futures contract added 1.6% to 17.00 cents a pound.

Funds and options

Thursday's price gains were attributed largely to technical factors, besides overnight weakness in the dollar, which boosts the affordability of exports denominated in the currency.

Monday will see the expiry of May options, a dynamic which often tends to pull futures prices to levels where a large group of options is priced.

"We have a tendency during these run-ins to gravitate to a range between two strikes of large open interest, said Tom Kujawa, co-head of the softs department at Sucden Financial, adding that this time this "looks like 16.50 and 17 cents a pound".

Furthermore, "it seems likely there will be a relatively large amount of puts relative to calls in the money on Monday night, which may provoke some profit taking support" to prices.

Furthermore, the growing extent of the fund short in raw sugar futures and options – which last week topped 100,000 lots for only the second time in 18 months – has raised doubts about speculators' appetite for more such positions.

Indeed, with some technical analysts seeing charts for broader raw materials indices such as the CRB as indicating buy signals, "there is a case for the shorts in sugar, despite the general statistical surplus year and start of our main harvest, to be a little concerned about commodities as an asset class".

Sugar vs ethanol

However, ABN Amro forecast downward "pressure" on sugar prices ahead, flagging the fresh supplies from the opening of a 2017-18 cane crushing season in Brazil, the top producer and exporter of the sweetener.

The bank flagged "good weather conditions in Brazil and the fact that mills will increase production [of sugar] at the expense of ethanol," which competes with the sweetener for cane.

Furthermore, the bank downplayed the impact of India's decision earlier this month to allow raw sugar imports, following a weather-hit domestic cane harvest, saying this had "done little for the price of sugar".

'Bullishness is muted'

The bank found support for its assessment from veteran soft commodities analyst Judith Ganes-Chase, who flagged that the volume of sugar India was now expected import "is only 500,000 tonnes rather than 1.0m-1.5m tonnes previously considered, with some even believing India at one point would import as much as 2.0m tonnes.

"As a result of the reduced tonnage, the bullishness from this is muted," Ms Ganes-Chase said.

Indeed, "India could see a production recovery in 2017-18 and return to shoring up domestic supplies once again," potentially helping the world return to a world sugar output surplus next season, after two years of deficit.

While there are forecasts for an El Nino, which has a history of cutting India's monsoon rains, "the transition to an El Niсo may come too late to hamper sugar output in India and Thailand as it did the past two years.

"There simply has not been a time when there were three consecutive large [world sugar production] deficits."

Soybean price outlook

ABN also cut its forecast for Chicago soybean futures, by up to $0.50 a bushel, seeing them end June at $9.20 a bushel, well below the $9.69 Ѕ a bushel being priced in by July futures.

Soybean futures were seen ending 2017 at $9.50 a bushel, below the $9.70 Ѕ a bushel the January 2018 contract was trading at.

Soybean prices will "remain under pressure", the bank said, flagging the prospect of record US plantings of the oilseed this year.

"The increase of acreage of soya in the US and the favourable weather conditions in large soya producing states are putting pressure on the prices of soya."


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