Sugar price reversal 'won't turn into rout', says Rabobank


Rabobank called time on the reversal in sugar futures, despite becoming the second commentator within 24 hours to cut expectations for the world output deficit in 2016-17, and flagging too expectations of a potential surplus next season.

The bank cut to 5.5m tonnes, raw value, its estimate for the global sugar production shortfall this season, citing in particular an improved estimate for Chinese output, upgraded by 800,000 tonnes to 10.8m tonnes thanks to a higher cane sowings figure.

The forecast for Chinese consumption was lowered too, by 1.0m tonnes to 15.5m tonnes, thanks to increased competition to sugar from corn-based sweeteners, as government efforts to cut the country's huge stocks of the grain depress prices.

"The availability of cheap corn has encouraged industrial [sugar] users to switch to high fructose corn syrup instead," Rabobank said.

'Preliminary consensus'

The bank's revision to its estimate for the world sugar production deficit came hours after a, smaller, downgrade by Abares, the official Australian commodities bureau, to its forecast for the shortfall.

Abares trimmed its estimate by 300,000 tonnes to 7.0m tonnes, thanks to an upgrade to its figure for output by Brazil, the top producing country.

And Rabobank also flagged growing ideas that next season could witness a return to a production surplus, the first in three years.

"There seems to a preliminary consensus that 2017-18 is likely to see an increase in sugar production that could bring the global supply-demand situation back into balance, or even surplus," the bank said.

"As a result, it could be argued that a fundamental rationale for funds to believe the market has peaked has emerged."

'Inherent uncertainty'

The bank acknowledged that returning New York raw sugar futures, trading on Tuesday at 19.24 cents a pound, to the levels above 20 cents a pound which prevailed for the two months to mid-November "may not require a significant event" in terms of a sugar supply squeeze.

However, downside to prices too appears limited.

"The 2017-18 crop year is a long way off – the major Asian harvests for 2016-217 have only just got underway,

"We therefore believe that the prospect of continuing tight market conditions in the immediate future, plus the inherent uncertainty regarding 2017-18, should prevent the recent decline in sugar prices from becoming a rout."

New York futures are, on a spot contract basis, some 20% below their October high.

Brazil tax issue

The bank also stressed the potential significance to sugar prices of Brazilian plans to reimpose on ethanol the so-called Pis/Cofins tax, from which it has been temporarily exempted since 2013, unlike gasoline.

"At R$0.12 a litre, the tax would represent a considerable bite into ethanol profits if the cane sector were to have to absorb 100% of the tax, and found itself unable to ass on any of the increase down the supply chain."

The imposition of the tax would, in forcing ethanol prices lower to maintain their competitiveness against gasoline, also lower a safety net for sugar prices.

Parity for cane processors, in terms of the financial rewards of the turning the crop into ethanol or sugar, tends to represent something of a floor for prices of the sweetener in Brazil.

"The return of the Pis/Cofins tax is a negative influence on the arbitrage, in the sense that it lowers the world sugar price at which producers begin to favour ethanol over sugar."


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