The commodities market, be it hard (metals) or soft (agriculture produce) or energy, has had a bad run in 2015. Lower global demand severely affected the commodities market, which failed to attract the ‘easy money’ from quantitative easing.

 

However, not all commodities were sluggish. In a recent spurt, sugar moved sharply higher catching most tradersunawares. Sugar stocks too rallied in India after a big lag in the commodity markets.

 

When it comes to tracking sugar, rather than tracking demand, which is slowly increasing globally and is widespread, analysts prefer keeping a close watch on supplies. Brazil and India are the two main producers in the global market. However, India is also a major consumer of the commodity, with a surplus of only 15% which enters the global market.

 

However, recent chain of events lined in such a way in both the producing countries leading to a sharp 30% rally in sugar prices after the commodity touched a seven-year low on August 24, 2015.

 

A consensus amongst global commodity analysts for a secular bull run is building up. We look at five reasons why sugar prices may remain high.

 

1. Poor Indian monsoon can impact next years output: Poor monsoon in India, the second largest producer of sugarcane and sugar, would affect supplies. Though it’s still early days, analysts’ estimates vary the extent of production loss. There is a consensus on the fact that production will be lower but the quantum varies. Problem in estimating the impact is because in India planting of sugarcane starts in November and continues till January. The current estimates are for crop sown in the previous season. Scanty rains have withered the standing crop which is now being used by farmers as cattle feed. With reservoir levels at a decade low, it would be a difficult call for the government to release water for a guzzler crop like sugar cane. Sanjeev Babar, managing director of Maharashtra State Co-operative Sugar Factories says that Maharashtra’s output could drop nearly a quarter to 8 million tonnes next season.

 

2. China imports: Slowdown in China has resulted in falling imports of almost all commodities. However, when it comes to sugar, the country has been a strong importer. China is the world's largest importer of raw sugar, followed by Indonesia. The International Sugar Organization (ISO) said that China is on track to reach record raw-sugar imports for the year ended September 30, with high internal prices of sugar and lower-than-expected production. From October to June, China has imported just under 3.4 million metric tonne of raw sugar versus 3.3 million metric tonne over the year-earlier period. The ISO is predicting China will import 4.5 million metric tonne this year, a record, and that it will break that record again next year, importing 4.6 million tonne. China is the only bullish story in the sugar market, says ISO.

 

3. Diversion from cane to ethanol in Brazil: Though sugarcane processed this season in Brazil declined by 2.1 per cent, sugar output in the country fell by 11 per cent.  This is because mills were converting more cane to ethanol in anticipation of a hike in gasoline prices as imports. A 30 per cent drop in Brazilian real in two months is prompting its government to encourage production of ethanol from sugarcane for blending with petrol. Business Standard reported that hydrated ethanol sales jumped by 45 per cent between January and August this year over last year. In August alone, hydrated ethanol sales jumped 56 per cent in Brazil. With the Brazilian currency unlikely to improve in the near future, diversion to ethanol can continue in the next season.

 

4. Change in futures contract: Expiration of October sugar contracts has added to the improved sentiment of sugar, says Greenpool Commodities sugar analyst Tom McNeill. March contracts are always valued a little stronger than October. The previous October contract was seen to be the focus of the existing oversupply in the market to some degree.

 

5. Short covering and long build-up: Sugar as a commodity had seen build-up of bear position for most part of the year. The traders turned net long in the week to September 29, 2015 with the biggest swing bullish position in 14 months. As of Tuesday, long positions outweighed shorts by 23,452 contracts. It is only the third time this year that the bulls have outweighed the bears with the highest net bullish position since July 22, 2014.
Tags: Ethanol Sugar