Sugar Slump May End as Importers Rebuild Inventories, Ethanol Demand Grows

The slump may be ending for sugar, this year’s worst-performing commodity, as importers replenish stockpiles and as demand increases for ethanol made from cane.

Raw sugar may trade as high as 20 cents a pound in New York by October, up 33 percent from yesterday’s close at 14.99 cents on ICE Futures U.S., said Peter Baron, the executive director of the International Sugar Organization. Newedge USA, a commodity broker, expects a rally to 17 cents in the next three months.

Prices plunged as much as 57 percent from a 29-year high of 30.4 cents on Feb. 1 as importers slowed purchases and rising output from Brazil and India, the largest growers, was forecast to erase a global production deficit next year. Dwindling inventories and lower prices may revive purchases.

“There will be restocking by some countries -- maybe not to the extent as before, but surely they need some sugar,” said Baron, a former German agriculture official who has run the London-based ISO since 1994. “Just like the steep rise was not warranted, the fall has also been exaggerated.”

Raw sugar for July delivery rose 0.66 cent, or 4.4 percent, to 15.65 cents today on ICE Futures U.S. in New York, capping an 11 percent gain for the week that was the biggest since Oct. 16.

Sugar futures more than doubled last year as a dry spell hurt cane production in India and too much rain damaged crops in Brazil. The sweetener slumped 44 percent this year, more than double the decline of any other commodity tracked by the Reuters/Jefferies CRB Index except natural gas, down 26 percent.

Global Inventories

Global stockpiles will drop to 52.8 million metric tons, or 32 percent of total consumption, in the year ending Sept. 30, the lowest ratio in 20 years, ISO data show. The new season will begin with “a critically low level of stocks,” the industry group said in its quarterly report on May 13.

Inventories in India, the largest sugar consumer, are equal to about two and a half months of consumption, said Baron, 69. He added that the country normally held six months of supply. In the U.S., the stocks-to-use ratio is 7.9 percent, the lowest level in 53 years, government data show.

Sugar isn’t likely to trade below the “watermark” of 13 cents in the next three to five years, even as volatility increases, Fred Zeller, the managing director of sugar-beet growers group SZVG, said in an interview in New York. Sugar reached 13 cents on May 7, the lowest level since April 2009.

“Brazilian farmers will be losing money at that level,” Zeller said. His Ochsenfurt, Germany-based organization has 36 factories across Europe and produces about 3.5 million metric tons of sugar a year.

Production Outlook

India’s sugar production will be “slightly” more than an earlier estimate of 18.5 million tons in the year ending Sept. 30, and next year, it will top domestic consumption of 23 million tons, according to government estimates.

In Brazil, output will be 38 million tons in the season that began in April, up from 32.9 million a year earlier, according to industry consultant and researcher Datagro Ltd.

“People were worried about oversupply, but prices cannot sustain below the 15-cent cost of production in Brazil,” Baron said. “The demand for ethanol will also support prices.”

Refiners in Brazil, the world’s largest exporter, are using more of the domestic cane crop to make fuel after sugar prices slumped, Ben Pearcy, the chief development officer of Bunge Ltd., the world’s largest sugar trader after Cargill Inc., said in an interview on May 19.

The country’s ethanol production will rise 19 percent to 30.7 billion liters this year, outpacing the 16 percent increase in sugar output, said Plinio Nastari, Datagro’s president.

Ethanol Demand

Oil companies are investing in biofuels research as governments ramp up mandates for use of alternative fuel in a bid to curb reliance on oil. Royal Dutch Shell Plc, Europe’s largest oil company, expects the share of renewable energy in transport fuels worldwide to double over the next 10 years.

Brazil’s ethanol is “unmatched” by its U.S. and European counterparts in efficiency, said Farideh Bromfield, the head of commodities research at ED&F Man in London. The country produces 9.3 units of clean, renewable energy for every unit of fossil fuel spent, Bromfield said. In the U.S., where ethanol is made from corn, refiners get 1.3 to 1.8 units for each unit of fossil fuel, she said.

“Demand for ethanol and rising consumption of sugar in Asia will support higher prices,” said Michael McDougal, a senior vice president at Newedge USA.

To contact the reporters on this story: Yi Tian in New York at ytian8@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net.

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