The fundamental shift in raw sugar market sentiment has continued in recent sessions, with a statistical global raw sugar deficit of between 10 and 15 million tonnes over the 2015-17 Seasons finally giving Aussie sugar producers the upper hand.
QSL Treasurer Stephen Stone said an important market dynamic was currently in play, with sugar consumers now the more vulnerable market participant and market speculators no more than short-term drivers of volatility.
Mr Stone said general market perception had discounted talk of a good crop in the world’s sugar powerhouse Brazil, and was now more focused on demand in Europe and Asia, and a lack of water for sugar producers in the Northern hemisphere.
“India and China are developing markets where weather has and may continue to cut sugar production forecasts,” he said.
“The last time India had domestic sugar prices at this level, the ICE 11 raw sugar price was trading closer to US30c/lb.”
Mr Stone said that due to a period of currency weakness, Brazilian producers were already well priced, which made continued sugar price strength more likely. Market upside for the 2016 Season remained more probable than deep price corrections to the downside. As a result, consumers were now hoping to see 14c/lb-14.50c/lb for their underweight hedging programs.
In the white sugar market, refining premiums are currently trading at about US$110 per tonne and have spent very little time below US$90 per tonne in the past six months, after averaging US$85/t during the past two seasons.
“As a measure of demand, premium levels continue to reflect a market becoming increasingly tight,” Mr Stone said.
The Brazilian Sugarcane Industry Association (UNICA) has delayed crop updates by a week, diluting the impact of positive production news, and forecasters now suggest wet weather is on the horizon.
“The political landscape in Brazil also appears less murky and as a result their currency strengthened from 4.15 to 3.45 against the US dollar in 2016,” Mr Stone said.
“This 20 per cent appreciation may further defer new pricing intentions for the Brazilians.”
On the ethanol vs sugar front, ethanol parity now sits at between 3c/lb and 4c/lb under current sugar prices.
Mr Stone said that while this was of some concern, we were now seeing lower wholesale prices being reflected at the pump in Brazil, leading to a sudden pick-up in ethanol demand as the efficiency ratio dips.
Looking ahead, he said speculative activity would cause increased raw sugar market volatility and was of concern as net longs approached 20% of total open interest in the ICE 11.
“This hot money is unavoidable, with real interest rates near zero globally and even below 0.5% here in Australia,” he said.
So will prices continue to strengthen or will we see a nasty downside correction?
“I believe the answer to both is yes,” Mr Stone said.
“This is simply a matter of time horizons. Speculators will cause 2-cent corrections, and one is now overdue. Corrections will be welcomed by consumers who will ultimately chase prices higher again.