Sugar price slump underplays weather risks, says Rabobank


Rabobank sounded a sanguine note on sugar futures, foreseeing the potential at least for outperformance of more distant contracts, cautioning that investors were underestimating potential weather risks.

The bank acknowledged the dent to market sentiment from some increasing expectations for the 2017-18 world sugar production surplus, forecasts for which have "over the last couple of months" risen from 2.0m-3.0m tonnes to "a wider range, with 5.0m tonnes at the top end".

Furthermore, the much-watched level of so-called "ethanol parity" in Brazil – the price point at which the biofuel and sugar are equally financially rewarding for mills, which can process cane into either product – "could certainly go lower", with negative implications for sugar values.

"Ethanol prices may not yet have reached their low-point for the season," said Rabobank, noting that Brazilian domestic sales of hydrous ethanol, used in cars which can run on either the biofuel or gasoline, are below year-ago levels because of its relatively high price compared with gasoline.

A drop in gasoline values, sparked by a series of cuts by state giant Petrobras to its prices, means that "the discount of ethanol prices to gasoline prices has yet to reach a level that triggers a substantial switch to ethanol at the pump".

As of May, ethanol stood at a discount of 30% to gasoline, compared with 34% in May last year, and 36% in May 2014.

'Risk premium not there'

Nonetheless, Rabobank analyst Andy Duff cautioned against overestimating the dent to sugar price prospects from such factors.

"We continue to feel that the boost [a world production surplus] would give to the global stocks-to-consumption ratio in 2017-18 would be relatively modest," Mr Duff said.

While the stocks-to-use ratio, a key pricing metric, is poised to return above 40%, it would remain below levels seen in 2013-14, 2014-15 and 2015-16.

And the forecast rise in supplies "is assuming the weather co-operates in places like Brazil, India, the European Union and others between now and September 2018.

"Under these circumstances, we would expect the presence of some sort of risk premium in the price curve into 2018, and it doesn't seem to be there at present."

Indian prospects

Rabobank itself put the world production surplus in 2017-18 at 2.7m tonnes, following on from a deficit this season pegged at 4.8m tonnes.

The 2017-18 number factored in an "increasing probability" that output in India, the world's second-ranked producer of the sweetener, recovering to 26.7m tonnes "following a good start" to the monsoon rains.

That estimate is above forecasts for many other commentators, with Sucden, for instance, putting output at 24.5m tonnes, and the US Department of Agriculture at 25.8m tonnes.

Official Indian data peg domestic sugar production in 2016-17 at 21.3m tonnes, with dryness in many key cane-growing areas depressing output from the 27m-tonne levels seen the previous season.


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