Sugar price tumble premature, says SocGen

The decline in sugar prices, which fell back below 27 cents a pound on Tuesday, could prove short-lived, as a squeeze on supplies represented by strong Chinese demand and flat Brazilian production prospects comes to bear.

New York's May sugar lot fell more than 4% at one point to 26.37 cents a pound, amongst the lowest levels for a spot contract for the last four months, after India confirmed permission for 500,000 tonnes of unrestricted sugar exports.

The sweetener has lost more than one-quarter since hitting a 30-year high last month.

India's move ended months of speculation over shipments from the world's second-ranked sugar producer at a time when, with top-ranked Brazil in the intercrop season, alternative export supplies are limited.

China factor

However, Societe Generale raised doubts over India making significant follow-on shipments, given that controlling inflation, in part by protecting domestic food supplies, has become a "short-term priority".

Furthermore, alternative export supplies may not be forthcoming for a while to meet demand being stoked by China's increasing reliance on imports, after frosts cut expectations for its own output to 11m tonnes, leaving it with a supply deficit of 3m tonnes.

"Consistently underestimating Chinese imports has become a typical feature of agricultural markets," the bank said.

'Upside surprise'

Australia's export potential had been "limited" by flooding in Queensland, the top producing state. "Now down to 3.5m tonnes, Australian output is the lowest it has been in 20 years," the bank said.

SocGen forecasts for world sugar, 2011-12 and (year-on-year change)

World output: 176.2m tonnes, (+5.4%)

World demand: 170.4m tonnes, (+1.5%)

Balance: +5.8m tonnes

Year-end stocks: 63.8m tonnes, (+10%)

Stocks-to-use ratio: 37.4%, (+2.9 points)

Meanwhile, Brazil's producing season had ended much earlier than last year and might restart later than usual, as a knock-on effect of a cane profile containing large amounts of ageing or newly-replanted cane – both relatively unproductive.

"The foreseen stagnation in the amount of sugar cane crushed means that Brazilian mills will have the ability to maximise the sugar yield by delaying the start of production as much as possible," SocGen said in a report.

The firm demand, and longer-than-usual Brazilian intercrop season, will combine "to keep the world sugar market tight".

With Chinese imports likely to "surprise the market on the upside, and therefore drive sugar prices higher", New York's near-term raw sugar lot was likely to average 32.5 cents a pound in the second-quarter, up from an average of 31.4 cents a pound so far in 2011.

Back to surplus

Nonetheless, this could represent the sugar rally's last great hurrah, with prices set to weaken in the second half of the year, as the fading of the La Nina weather pattern allows better conditions in countries from Russia to Thailand.

SocGen forecasts for New York and London sugar futures

Q1 2011: 31.4 cents a pound; $767 a tonne

Q2 2011: 32.5 cents a pound; $802 a tonne

Q3 2011: 28.4 cents a pound; $716 a tonne

Q4 2011: 25.0 cents a pound; $646 a tonne

"World sugar production is likely to increase significantly in 2011-12," SocGen said, pegging output up 5.8% at 176.2m tonnes.

Demand, meanwhile, will grow 1.5% to 170.4m tonnes, giving the sugar market its first production surplus in four seasons.

"When the next Brazilian season is running at full speed, and a strong rebound in production in the northern hemisphere appears plausible – weather permitting – we believe that prices could start to decline gradually," the bank said, forecasting an average price of 25 cents a pound in the last three months of the year.

(Source: http://www.agrimoney.com/news/sugar-price-tumble-premature-says-socgen--2958.html)