Sugar futures plunge but cash is yet to follow

by Ron Sterk
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KANSAS CITY — Although spring is approaching and many ingredient buyers’ focus will be turning to grains and oilseeds, sugar prices continue to command attention, especially as significant declines in futures values have yet to be reflected at the cash level.

Falling from the highest levels in decades, New York world sugar futures (No. 11) dropped to seven-month lows last week, reflecting shifts in currency values and the worldwide supply picture. Domestic raw sugar futures (No. 16) also declined, but less dramatically. The No. 11 nearby May futures price was near 19c a lb late last week, down more than 30% from 29-year highs set around the first of February, with No. 16 May down about 15%, nearing 35c a lb.

Offering prices for physical bulk refined beet and cane sugar for nearby delivery, meanwhile, have held steady at 53c a lb since Jan. 22. Most beet processors are nearly sold out of sugar for the year. Cane refiners, as well as sugar users, have been pushing the U.S. Department of Agriculture to raise raw sugar import quotas as a way to increase domestic supply nearby. Most in the industry do not expect the U.S.D.A. to make a change before April 1, and many do not see an import increase at all in view of the latest futures price declines, with the exception of reallocation of some quotas.

Sharply lower futures prices in part reflect the influence of speculative funds, which were buying futures when prices were rallying a few months back but have more recently been selling. A stronger U.S. dollar over the past few weeks also has played a role as it takes fewer dollars to buy the world commodities.

But the declines also show fairly rapid turnaround in supply, at least on the world stage. In just the past couple of weeks Indian buyers have backed out of at least 100,000 tonnes of import contracts for raw and refined sugar, with another 500,000 tonnes at risk, according to press reports, and Egypt passed on a tender for 300,000 tonnes of raw sugar. The Indian deals were done when sugar prices were soaring and recent declines have made it more profitable to pay penalties to default than to take delivery. There has been no evidence of a change in actual consumer demand in either country in such a short period, although most analysts agree high prices have likely caused some demand erosion world wide over a longer period.

The import actions, along with the futures price changes, are mostly supply oriented. Production estimates in India have been raised about 20% from earlier forecasts, although outturn of around 17 million tonnes still will be well below average and will be about 25% short of demand. It was shortfalls in production in India for two consecutive years, by 35% to 40% in 2008-09 and by 25% to 30% in 2009-10, that were the primary stimulus behind the global sugar price run-up.

Production in 2010-11 is expected to further approach average levels in India.

The key to the recent futures price swing has been Brazil, the world’s largest sugar cane grower, sugar producer and exporter. Traders are eyeing new crop Brazil cane sugar production (April-March marketing year), which some forecast will be up more than 10% from 2009-10. Although Brazil uses more than half its cane crop to make ethanol, the increase, if realized, is expected to allow the country to boost exports by more than 3 million tonnes from 2009-10. Crushing of the new cane crop already was under way.

For the past several months it seems the trade, at least investment grade fund money, was eyeing bleak forecasts of a global sugar shortfall in 2009-10, with estimates ranging from 7 million to 14 million tonnes. But suddenly the attitude has shifted to one of adequate supply if not possible surplus just a few months down the road, with the International Sugar Organization forecasting a 1 million tonne surplus in 2010-11.

Trading of bulk refined sugar has been slow the past couple of weeks in the United States, which makes it difficult to determine if cash prices are beginning to decline nearby. Most buyers clearly are holding out as long as they can on ideas that cash values will follow futures prices lower, or at least until April 1 to see if the U.S.D.A. raises import quotas. Such a decline in cash is inevitable, based on sharply lower values for 2010-11, as well as in lower futures prices going forward, but probably not as soon or as significantly as buyers would like because of the somewhat isolated nature of the U.S. sugar industry.

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