Sugar market 'good value', JP Morgan says, seeing 'exhaustion' in price downswing

02.05.2018

Sugar prices offer “good value”, JP Morgan said, advising buyers to step in, even as BTG Pactual issued a somewhat more downbeat assessment, forecasting prices in 2018-19 at their weakest in 12 years.

Both banks concurred that the worst is over for sugar prices, which as measured by New York raw sugar futures were, at a multi-year low set last week, down 29% so far in 2018.

“The good news is that prices may be close to a floor,” Sao Paulo-based BTG Pactual said, heralding revisions to its ratings on shares in cane processors such as Sao Martinho and Adecoagro.

JP Morgan said that “recent closes above important technical levels,” such as 11.41 cents a pound for the New York July contract, “signal that a bottom is forming”.

“The slowdown in producer selling below 11 cents a pound, and limited investor appetite to add fresh shorts, indicates that the market is approaching trend exhaustion ahead of Monday’s May 2018 contract expiration.”

‘Bigger and longer’

However, BTG Pactual, forecasting a world sugar output surplus of 5.52m tonnes this season and 5.19m tonnes in 2019-20, was more downbeat over the prospects of a price revival, saying that “prices may stay at about 11-12 cents a pound for another year”.

In fact, the bank forecast prices averaging 10.5 cents a pound in 2018-19, down 3.0 cents a pound year on year, and the lowest season-average value since the 10.4 cents a pound recorded in 2006-07.

BTG Pactual, flagging a “bigger and longer” world output surplus, highlighted the prospect of only a small reversal in Indian output in 2018-19, to 30m tonnes, from the record high of 32m tonnes expected this season.

Meanwhile, Thailand “is expected to produce over 14m tonnes next year, and the European Union is now expected to keep producing above 20m tonnes”, keeping the bloc as a net exporter.

Sugar vs ethanol

JP Morgan, however, restated expectations of New York sugar prices reviving to average 15.0 cents a pound in the October-to-December quarter, and 16.0 cents a pound or more in mid-2019, flagging the prospect that the Brazilian Centre South cane crush may not extend its better-than-expected start, as revealed in industry data last week.

“Limited April rainfall will weigh on agricultural yields,” JP Morgan analyst Tracey Allen said.

Furthermore, while tumbling Brazilian ethanol prices have cut so-called “ethanol parity” – the level at which the biofuel and sugar are equally attractive financially for mills to manufacture from cane – the biofuel remains “at a significant premium to sugar”.

Indeed, JP Morgan - estimating ethanol parity at 13.9 cents a pound in sugar terms for anhydrous ethanol and 13.5 cents a pound for hydrous - said that weaker prices of the biofuel would boost demand and support prices.

“We anticipate that the recent weakness in the parity will ease and that mills will continue to maximise ethanol output” from cane, at the expense of sugar volumes.”

‘Good value’

JP Morgan added: “We consider that the balance of price risks for sugar prices from current levels is skewed to the upside, and maintain our recommendation on upside call option structures.

“Prices across the curve offer good value to consumers to take advantage of.”

In New York, best-traded raw sugar futures for July stood up 1.0% at 11.64 cents a pound in lunchtime deals on Monday, taking to 6.5% their recovery from last week’s low of 10.93 cents a pound, which was the lowest for a nearest-but-one contract in nine years.

London white sugar futures for August gained 0.6% to $329.50 a tonne, up 5.8% from last week’s low of $311.40 a tonne, the weakest for a spot contract since late 2008.


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