In the never ending battling of bears vs. bulls, this week has provided a whole lot of fodder but not a whole lot of clarity as to who may end up winning. At least not in the short term. The long-term is a whole other question but probably one that’s answered by “what ever you didn’t hedge for.”
Recent weeks have seen dry weather boost cane harvest and processing in Brazil to record levels. Bears were really eager with this news, doing their best to drag down prices on the expectation that excess supply will mean the surplus is finally here. But UNICA to HSBC to Datagro have come back this week saying that even though the cane harvest will be larger than first feared, actual sugar and ethanol production will be lower.
Then you’ve got the ethanol factor, with UNICA finally convincing the government that it should bump the anhydrous ethanol blend in gasoline back up to 25% early next year. The plan is to boost the blend even further to 30% by 2020. Datagro figures that the ethanol required for the mandate will sacrifice some of the surplus sugar that might be floating around, further reducing already smaller-than-expected sugar production for this season.
Also smaller than expected is the Indian harvest, with production seen coming in at around 25 million tonnes rather than the 26 million tonnes originally expected. Next year’s harvest is likely to be smaller as well due to the poor monsoon this season, which could cut sugar production in Maharashtra alone by 40%. But large stocks and a decent enough crop means there will still be some export availability next year. It’s just not clear yet how much that will be, and that answer probably won’t come for a while yet.
Tally: Bulls 1, Bears 1
On we go. Some European sugar producers are seeing some gangbuster yields and may even break a record year or thereabouts. Others are not doing so well with drier conditions and perhaps even drought-type extremes. Current expectations are that EU sugar production will come in below expected, which could mean the need for more imports.
China is having a great crop and may even break some records there as well. Production is expected to top 13.7 million metric tonnes, up nearly 20% on the year after they had such a lacklustre performance last year. This is good news for the country’s industry and may indicate real commitment to boosting domestic sugar production.
But it’s also on a serious buying spree in order to re-stock its reserves. Imports are already more than double last year’s at 2.43 million tonnes through August. Now the country has announced that it will buy another half million tonnes to make sure that the stocks are ready for whatever supply shocks may come in the next few years, after seriously depleting its reserves following its dreadful crop last year.
That question of re-building stocks is what’s likely going to keep a would-be bear market bullish for quite some time. The old adage of buying in the dips is partly what could be driving this recent up, down, up, down seesaw effect that has been prevailing in the market for the past couple of weeks. Granted, it hasn’t been as extreme as recent years when we’ve seen 100-point drops in a day, but it’s still a tad dizzying. As soon as there’s news of expected surplus, it drops and brings re-stockers in, which brings the price back up. Then news of a poorer crop somewhere in the world lifts the price even further and buyers have to wait for another dip.
Earlier this week Indonesia said that its plans to become self-sufficient in sugar this year had failed fairly miserably and they would be off their estimates by nearly half. That means imports again, somewhere around the typical level of half a million tonnes based on standard annual domestic production of 2.7 million tonnes. So rather than not needing imports and supporting the bears, the surplus won’t be getting any more traction thanks to would-be lower demand from Indonesia.
Around the corner, Thailand is already cutting its production estimate from this past season’s mega-record, and that’s having a knock-on effect on expectations for exports. Currently they’re seen down by 200,000 tonnes even if production is seen slipping by half a million tonnes. It’s still early days though. Australian exports might help to compensate there in the region with new figures estimating 12% more exports during 2012/13 at around 3.4 million tonnes, so at least that’s good news.
So where does that put the tally? Bulls 4? 5? To Bears 1?
Of course so much could change. The US harvest is just getting underway with most states expecting record-breaking yields. The American sugar market looks like it’s going to be well supplied long enough for it to keep its sugar policy in place through farm bill negotiations, even if those don’t come along until the new Congress sits in January. Mexico continues to lie about whatever it’s doing, and if Syngenta gets its way, Southern Africa could double their production. But don’t count on any of it. It’s a surplus out there but the bulls are still in control.