Cutbacks in the world’s largest sugar producer could end a multi-year supply glut, sending prices higher next year, according to traders.
Brazilian producers, who accounted for over 40 percent of sugar exports last season according to the U.S. State Department of Agriculture, are closing mills and reducing sugarcane investments following four straight seasons of excess production, sparking bullish calls on the sweetener.
“We reiterate our view that production shortfalls could cause consumption to exceed production in the coming season, leading to a drawdown in inventories built up over the past four years,” Abah Ofon, agricultural commodities research at Standard Chartered told CNBC on Monday.
To boot, sugarcane industry group Unica slashed its 2014-15 output forecast in the country’s Centre South region, which accounts for nearly 90 percent of domestic production, by 1.1 million tons as a result of a drought earlier this year.
Calls for a recovery in sugar prices come even as the overall market mood remains bearish. On Monday, prices fell to a fresh seven-month low of 14.93 cents, well below the 100 day moving average of 17.38. Over the past two weeks, sugar has fallen over 2 percent and is down nearly 9 percent year to date.
In August, the International Sugar Organization (ISO) forecast extended price weakness and a 1.3 million ton production surplus for the year starting in October.
“The ISO believes that, even with the small forecast surplus, global fundamentals are unlikely to support a rise in market values from current values,” the organization said in a report, warning that consumption must outpace supply by at least 3 million tons in order for prices to recover.
Still, the organization noted Brazil’s worsening prospects, forecasting overall output to drop nearly 2 percent next season.
Standard Chartered says the trend in sugar futures justifies its bullish stance: “The futures curve is actually trading in contango, so the market is expecting prices to head higher as we move into next year,” Ofon continued.
The bank is long on sugar’s March 2015 contract and forecasts prices to rise above 18 U.S. cents a pound by year-end.
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Recent data support the optimistic mood. In the week to last Tuesday, speculators trimmed net short positions in white sugar options on NYSE Liffe by 117 lots, according to the exchange.
Will prices hit companies?
Higher sugar prices are unlikely to hit food producers, experts say.
“Even with higher prices, there will still be a lot of supply in the market. Of course, companies may hike their prices a little but it won’t be a situation where there’s an outright sugar deficit. The market will just change to a buyer’s market form seller’s market,” said Avtar Sandhu, senior manager of commodities at Phillip Futures.
Phillips expects sugar to hit 19 cents on average in 2015, despite the threat of a stronger dollar amid speculation of higher U.S. interest rates next year. Commodities that have bearish fundamentals will be hit by a strengthening greenback. If sugar’s fundamentals change, it won’t be impacted as much, Sandhu explained.