Dubai conference talks up a bullish market ahead of surplus

Published: 02/13/2017, 6:20:07 AM

Counting on next season's return to surplus to buy your sugar cheap? You may want to hedge your bets, according to Bloomberg.

While most analysts forecast supplies will exceed demand in the 2017/18 season that starts in October for most countries, stockpiles will remain at historically low levels, "affording little latitude for under-performance in the major sugar producing countries," according to Sean Diffley, head of sugar and ethanol at Tropical Research Services, which advises hedge funds.

With more than eight months to go, a lot could still go wrong to wipe out the 1 million to 3 million tonne surplus range forecast by analysts including TRS, F.O. Licht GmbH and Kingsman SA, a unit of S&P Global Platts.

From the return of El Nino to the continuation of Indian imports and even the policies of US President Donald Trump, here are six key concerns that participants at the Dubai Sugar Conference say could spoil the bearish party.

Less than a year after the end of one of the strongest El Ninos on record, bringing dry weather and havoc to crops in Asia, meteorologists are already forecasting its return.

Climate models suggest neutral conditions or El Nino are the most likely scenarios for the southern hemisphere winter-spring period, Australia's Bureau of Meteorology said last month.

The odds that the weather pattern would form by the end of the year are now 50%, up from a previous rating of 36%, the US Climate Prediction Centre said.

"The models are suggesting that El Nino may resurface in the second half of 2017," said Tracey Allen, an analyst at JPMorgan Chase & Co in London.

"There are wide expectations that Asian sugar production will normalise this year and that's really very much dependent on the monsoon. That's also a pivotal point for sugar production and potentially the transition to a more neutral to surplus balance going forward in the 2017/18 season."

Bears are counting on the rebound of production in Asia. But the scale of the recovery in India is still uncertain, said Gareth Forber, head of sugar research at LMC International. That's because water scarcity last summer in the state of Maharashtra has limited plantings of cane that will be harvested 18 months later.

"Secondly, water is still a problem in Karnataka so production may not rebound in this part of the country," he said.

Another factor that may trump the bears could be Indian imports. The South Asian nation may continue to bring in sugar in the 2017/18 season to help replenish tight stockpiles, said Tom Secretan, an analyst at London-based commodities trader ED&F Man Holdings Ltd.

Traders attending the conference fear that Mexico may end up with a lot more sugar than expected. That's because President Trump is seeking a review of the North American Free Trade Agreement, which allows Mexican sugar to flow into the US.

Higher Mexican supply, a delay in Indian imports and a faster pace of harvesting in Central America already mean that trade flows will have been roughly in balance in the first three months of the year, according to TRS estimates.

"Trade relations between Mexico and the US continue to deteriorate, raising the probability of a greater quantity of surplus Mexico sugar coming to the world market earlier," Diffley said.

Traders are counting on a rebound in European Union production as a system of quotas end on Sept 30. Kingsman sees output rising 14% to 19.3 million tonnes. Suedzucker AG, the bloc's largest producer, said in an interview at the end of last year that production could reach as much as 20 million tonnes.

While prices that rallied 28% in New York last year, the most since 2009, bring every incentive for growers to boost sowings, beets that will be planted for next season aren't even on the ground yet.

Chinese imports could surprise to the upside, said Jonathan Drake, chief operating officer of RCMA Commodities Asia Pte Ltd and former head of sugar at Cargill Inc. The nation already surprised traders last year, bringing in 3.7 million tonne of white sugar, he said.

"Everyone underestimated China last year," Drake said. "It's hugely profitable to import into China."

Lastly in Brazil, the currency in the world's largest producer is getting stronger, potentially reducing the incentive for millers to sell, and raising the price level at which they favour ethanol over sugar production. The real gained 22% last year, the most since 2009, and has advanced another 4.4% this year.

"My view is that we could very well see a similar sugar mix in 2017-2018 but that's based on expected strength in crude oil prices, and the potential for domestic gasoline prices to continue to rise in line with world market prices," JPMorgan's Allen said.

"The strength in the real more recently is also a very interesting factor going forward because most anticipated a slightly weaker foreign-exchange rate than where we are today."