Surplus is yet again on everyone’s lips. After three years of deficit, it would be impossible to think that there would be only one year of surplus (why are we still calling the previous year a surplus?) so obviously this year must be in surplus too.
Yet what everyone seems to have forgotten is the structural flaw that is keeping major sugar producers like Brazil, India and China from boosting production sufficiently to actually create a real surplus.
But let’s return to the state of the second year of surplus. Or third year, as some would like to think. Prices have indeed fallen about 6 cents since toying with 30 cents, yet prices are still far from the 9 cents or 12 cents that a typical surplus would indicate. When looking at price expectations, there has been talk of 22 cents or even 20 cents, but Macquarie has really put itself on the line with its expectation of 18 cents.
Prices might fall come mid-year, after Brazil gets its new crop out of the ground and into the mills but that will all depend on what is possible to produce. First crush is usually diverted to ethanol due to rains early in the harvest season, so it won’t be clear exactly how good the crop will look in terms of sugar production until May or June. With ICE futures for July a full 130 points down from the current front month, it looks like people are betting the crop will turn out OK.
But how can it turn out OK if production capacity hasn’t changed hardly at all from the last season to the next? Rain washed out some of last year’s crop, though it seems to be behaving more or less this year. Will the distinct weather patterns cancel each other out, turn out even, or will perhaps drier weather give the crop the boost it needs?
Maybe. But there’s still a lot of maybes.
Like maybe the infrastructure problems that create weeks and months-long traffic jams in the ports will get resolved this year, and transport from mill to port will improve as well. No, not really so likely.
There will be a lot of focus this year on renewing fields, which means pulling out old cane and waiting for the new cane to be ready to harvest. So the crop will look better a couple of years from now, but pulling out the old cane is going to cost production figures too. Maybe they won’t have much of an effect on overall figures though.
Supposedly there’s a lot of new cane that was planted last season that could be ready for this year, but even that 3% won’t mean as much as it will in a year or two because first ratoon never has the sugar content of matured cane.
FO Licht expects that a best-case scenario crop from Brazil could push prices down into the teens, but it doesn’t seem very confident that all of these issues will be overcome. Plus there’s still a lot of time left before the crush begins for a weather event to go in and mess things up.
Then there’s Cosan, the company who should probably have the best idea of what’s going on with the national crop. They’re saying it’s not going to be great, for all of the reasons already mentioned. In fact, they’re the only ones going against the analysts and predicting that sugar prices will go higher than they are. To where, they don’t know, but not as far as 30 cents.
Isn’t that comforting? Not as high as 30 cents. Of course they’ve already admitted that they priced nearly 800,000 tonnes of sugar by the end of 2011, or 27% of their exports, at 24.55 cents. Prices staying up is in their favour, but they’re set no matter what.
On the other side of the planet, the only place where the surplus seems to be evident, India’s got a lot of sugar leftover that they’re trying to get rid of. That sugar weighs down the market, but in reality there’s few outside of Al Khaleej who has any interest in it.
At the same time that India announced it had an extra million tonnes to export, China announced it wanted to stockpile 1 million tonnes. So that movement is neutral and will do nothing to support the idea of a surplus. In fact, since the market was expecting India to export more, that would reduce supply. But the clever ones have been watching China for a while so maybe it’s all been worked into current prices. Maybe.
But there’s still this idea that there’s going to be a big surplus. It would have to be pretty good for Macquarie’s dream of 18 cents to come true. Olam is saying between 6 million to 8 million tonnes, but they also figure that 2011/12 had a surplus of 9 million tonnes. Sure didn’t feel like it, did it? But say it was 9 million tonnes, and the market is where it is now, then if the surplus is going to be smaller than perhaps prices will go up slightly from where they are rather than head south. Poor Macquarie.
Kingsman figures that the surplus will also shrink from last year, which he thought was 8.2 million tonnes, down to a measly 4.7 million tonnes for this year. Sure, that’s a lot more than the first “surplus” year of half a million tonnes, but it hardly seems enough to push prices down from 24 cents to below 20 cents when Brazilians will supposedly magically begin favouring ethanol production rather than sugar.
So yet again, before the next crop really gets going, already estimates for this new surplus are shrinking. That’s certainly inline with the structural shift that will exist at least for the next couple of years but it’s not enough to get analysts to align their thinking and come up with consistent data. But don’t expect sugar to go below 20 cents, or at least not for long. If the market somehow gets weighed down sufficiently to get there, there’s a big enough ethanol demand underlying the market in both Brazil and Europe to keep the market afloat.