Sugar May Swing to Surplus Next Year, Kingsman Says

Global sugar output may beat demand for the first time in four years if “normal weather” returns to the biggest growing nations, according to Kingsman SA.

There may be a “small surplus” in the year from April 1 as farmers in Brazil and India, the top producers, boost crop area, Jonathan Kingsman, managing director of the Switzerland- based broker and researcher, said in a telephone interview.

A drop in prices in 2011, the first annual decline in four years, may help ease global food costs which climbed to a record in January according to the United Nations’ World Food Price Index. Sugar has more than doubled since the end of May on concern that global supplies will trail demand after crop damage from a storm in Australia and drought in Russia cut output.

“If the weather is normal, we would expect a slow erosion in values for the rest of the calendar year as the risk premium diminishes,” said Kingsman, who’s traded sugar for more than three decades. “We are less bullish because we have marked down import demand.”

The October-delivery contract may fall to 20 cents a pound on ICE Futures U.S. this year, Kingsman said before a three-day conference in Dubai starting Feb. 20. That contract lost as much as 2.4 percent to 24.48 cents in after-hours trading today.

Wheat Shortage

A surplus in the global sugar market may stand in contrast to deficits in other crops, including wheat, which have helped to push up prices and contributed to political instability in nations in North Africa and the Middle East. Global wheat output may be 645.4 million metric tons this season, while demand will be 665.2 million, the U.S. Department of Agriculture has said.

Corn is trading near the highest since July 2008, prices of soybeans have jumped 46 percent in the past year and palm oil has advanced 41 percent in the past six months.

Sugar production from Thailand, the second-largest shipper, may jump to a record 7.7 million to 7.8 million tons this year as wetter-than-average weather improves yield, potentially raising exports, Prasert Tapaneeyangkul, secretary-general at the Office of the Cane & Sugar Board said in an interview.

Kingsman in December predicted a deficit of 375,000 tons for the current year ending March. The brokerage will announce a final estimate, which will factor in weather disruptions in Australia and Russia, at the Dubai event. Its first estimate for 2011-2012 will also be released, he said.

The shortage will be exacerbated this year as cold weather in China and floods in Australia cut harvests, Kingsman said last week. The world may lose about 9 million tons of sugar in the year ending March 31 because of inclement weather, he said.

Cyclone Damage

Tropical Cyclone Yasi hit northern Queensland in Australia, a region growing a third of the country’s cane, cutting output potential in the area by about 50 percent, producers’ group Canegrowers said Feb. 4. That may keep exports from the world’s third-biggest supplier at a two-decade low of 2.2 million tons in 2010, according to Queensland Sugar Ltd.

Frost damaged about 1.9 million mu (126,667 hectares) of cane in China’s Guangxi province, the China News Service said on Jan. 12, citing the local agricultural authority. The nation’s central bank today raised reserve requirements for lenders for the second time this year to counter inflation.

“The market is already nervous and prices contain, what we call, a risk premium in it in case the weather is abnormal for another year,” Kingsman said.

Sugar for delivery from May 2011 through October 2013 is in backwardation, reflecting expectations that prices may ease in the coming months, he said. Backwardation occurs when near-term contracts are more expensive than those further out.

‘Delay Purchases’

“The spot market is in considerable premium to forward months and that is encouraging people to delay purchases and rebuild stocks,” he said, echoing a view from Cyrus Raja, general manager at Dubai-based Al Khaleej Sugar Co., the biggest sugar refiner, on Feb. 15.

“Many of the destination buyers are waiting in the hope that prices will come off” with the Brazilian harvest, Raja said in an e-mail. “The physical off-take is still slow.”

Raw sugar soared to 36.08 cents per pound on Feb. 2, the highest level since 1980. Prices can jump “much higher” if there’s more bad weather as stockpiles are low, Kingsman said. A drop below 20 cents is unlikely as prices below that level will prompt Brazilian mills to switch to making ethanol, he said.

Ethanol Prices

Output from Brazil’s Center South, the largest producing region, may exceed 34 million tons next season as cane output climbs to 575 million tons, Kingsman said.

“We would expect the Brazilian industry to maximize sugar production and minimize ethanol production because prices are much higher than ethanol prices,” he said. “Whatever they can do, they will try to maximize sugar production.”

India may produce about 25.3 million tons this season, said Kingsman, adding that the estimate will be revised after more clarity emerges on the yield of the cane planted in Uttar Pradesh, the nation’s biggest grower, he said.

To contact the reporter on this story: Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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