September 2010 - Déjà vu: is history repeating itself?

Market fragile as global balance remains tight

Is it a case of déjà vu in the sugar market? History often repeats itself and often when it’s least expected. Sugar prices are now almost back to the levels seen at the start of the year after an extremely strong performance in September. The rally in prices last month has been much steeper than the rallies of August and December during last year’s bull market and in terms of range is only matched by the fall in price during March 2010, when investors lost confidence and liquidated. Recent price action reflects similar behaviour although on this occasion it is buyers, short of price cover, who have driven the move as opposed to investors wanting to liquidate unwanted longs. Volatility on this scale makes the market look nervous but reflects the underlying fragility of the production balance following two years of stock draw-downs and many years of cost reduction in order to stay competitive at low prices.

  1. Despite the growth in sugar production in Brazil the outlook for global production is no longer indicating that the tight global stock balance will be resolved in 10/11. Spot futures prices are more than 2.00c higher than in late September last year.
  2. The market is already in backwardation as opposed to the contango structure last year, despite Brazil holding peak stocks.  The spot October contract has traded to almost 200 pts premium to the March before expiring at 182 pts premium. The strength of the spread is indicative of a number of factors: strong demand for Brazilian physical sugars, record underlying physical demand and a lack of alternative origins - especially Argentine raws, which were delivered last year.
  3. The hoped-for increase in global production has not materialised to the extent initially expected and as published in last month’s Review, we now believe that the balance sheet is more likely to be in equilibrium rather than surplus. As a result global stocks will not be rebuilt. We now expect the 10/11 season to show an increase in 14.8m mtrv of production, with all of this growth being provided by cane sugar production.
  4. 80% of this growth will take place in Brazil and India, which are increasingly dominating the sugar market’s focus, while most other countries are experiencing limited or zero growth, which in many cases has been due to extreme weather events despite initial plans to expand production
  5. The CS region of Brazil is in the middle of delivering another record crop this season with production forecast to be around 6m tonnes higher than last year. But exports will grow by just 3m tonnes.
  6. Though Indian production is also expected to increase by 6m tonnes in the 10/11 season the outlook for Indian production has recently been affected by the slow withdrawal of the current monsoon. India is expected to return to the export market in the 10/11 season, though the impact that India has had to-date has been less than initially promised.
  7. While the rise in global production at first glance suggests that the stress has been taken out of the balance sheet, the underlying reality in the physical market is different.
  8. The white sugar market is looking as though the supply problems experienced this year should resolve in 2011. The change in the balance is largely driven by India and the increase in refining capacity coming on stream. However, with unworkable market returns for deliverable sugars, the whites premium looks set to remain volatile.

Toby Cohen, head of analysis at Czarnikow, said: “Despite giving the appearance of a return to normality, sugar market statistics are indicating that the market has still to resolve problems created by the deficits of 2008/09 and 2009/10. At this stage there is little sign of the physical market calming down as the October expiry has illustrated. To see the market paying a premium for Brazilian sugar when Brazilian stock levels are at their peak and the market, theoretically, no longer in deficit seems almost ludicrous.

“However, behind the headline growth numbers, the underlying reality is that availability is extremely tight in the majority of markets as stocks have been drawn down. Though the start of Northern Hemisphere production will reduce the immediate need for imports from some countries the early return of demand from markets such as Russia and shortage of refining feedstock in Europe, as prices are below world market levels, could see physical demand increase should prices ease.”

Notes to Editors

For further information please contact:

Czarnikow 020 7972 6600
Toby Cohen
Peter de Klerk

Cubitt Consulting 0207 367 5100
Caroline Merrell
Michael Faulkner

About Czarnikow:

Czarnikow Group is one of the most respected names in agricultural commodity markets and has been providing high quality market services since 1861.  Czarnikow operates in three core areas; sugar, biofuels and corporate services. Their success is built upon knowledge of the market, confidentiality, reliability and independence.

Czarnikow deals with around 10% of the 50 million tonnes of sugar that is traded annually, which means that it has a first hand presence in all major sugar markets of the world.  Czarnikow works throughout the entire supply chain providing services to growers, millers, refiners, beet producers, traders, merchants and industrial users.

Czarnikow operates from a head office in London and a network of 10 regional offices to service clients and customers globally.