Author: Michael Ferrari, PhD
VP, Applied Technology & Research

World Sugar futures have dropped off from the recent highs in February (crossing 35 cents) down to a current range just under 22 cents; see FinViz chart below for recent performance of the July11 contract.  The spot price is now below both the 50 and 200 day moving averages.

 

Most estimates are putting the current year’s (Oct/Sep) supply balance at roughly a 1-2mmt surplus; a thin cushion following two years of net deficit.  High prices coupled with the prospect of continued strong global demand for the sweetener have certainly spurred an increase in plantings, and this is expected to produce a strong physical supply surplus going forward.  Now as we turn to the coming 2011/12 year, supply estimates are all over the board.  Jonathan Kingsman, one of the premier industry analysts, has called for a 2011/12 surplus of approximately 10.6 mmt, which happens to be the highest surplus estimate of those surveyed.  Surplus estimates for 2011/12 vary from a modest 6.5 mmt (conf. source) to the high end provided by Kingsman.  WTI is also expecting another year in surplus status for 2011/12, but our view is closer to the lower end of this range.  The suite of estimates has contributed to the bearish pattern seen in futures recently, but there may be an opportunity that accompanies this dip. 

There are two reasons for this potential opportunity.  First, many of the favorable supply expectations are figuring in large or even record crops in India, Brazil, China and Thailand.  These estimates are largely assuming very good growing weather throughout the upcoming campaigns.  We have noted that we agree with the Indian Meteorology Department’s outlook for a good start to the 2011 Monsoon, but we do see the possibility of mid-crop weather risk, which could have the potential to limit yields.  We still expect a good crop, but we are viewing the season with cautious optimism.  Second, the demand side of the equation will partially offset some of the strong surplus that is figured into many of the forward looking balance sheets.  If the demand piece keeps pace with increases in projected supply, the supply buffer may not be as safe as many are thinking, especially if oil remains anywhere near the current $100 range.  Remember, while oil is down from the highs in the $114 range, $99 oil is still expensive oil, and sustained high oil prices will lending additional support to the demand for sugarcane derived ethanol.

Next week in New York, many of the world’s largest sugar producers and consumers will convene for a series of events are part of the annual Sugar Week.  We anticipate that many of these topics will be discussed, and we will comment on any findings of interest.