Sugar price prospects are “skewed to the upside” because of wet weather in Brazil, the world’s biggest producer, and a lack of rain in second-ranking India, according to UBS AG.
Above-average rainfall in May and June resulted in sugar output in Brazil’s center south, the main growing region, falling 29 percent to 6.7 million metric tons in the 2012-13 season through the end of June, according to data from industry group Unica. India’s monsoon, which brings more than 70 percent of the country’s annual rainfall, was 22 percent less than a 50-year average since June 1, the weather bureau said July 15.
“March 2013 availability is on watch,” Wayne Gordon, a strategist at the company in New York, said in a report e-mailed today. “If the Indian monsoon remains behind schedule, this is a bullish shock for sugar in the first half of 2013.”
Further delays to the crop in Brazil may “encourage short-covering rallies,” Gordon said, referring to buying to close out bets on lower prices. Raw sugar climbed 8.2 percent last month on ICE Futures U.S. in New York as rains delayed the crop and exports from Brazil.
“We view supply-side constraints in Brazil as ongoing due to a lack of re-investment and some recovery in ethanol demand as oil prices stay elevated,” Gordon said. “Market balances will tighten again in 2013.”
The sugar market is currently “balanced,” with supplies from India and Thailand, the second-biggest exporter, making up for a shortfall in Brazil, he said, adding that the bank sees sugar as a “medium-term pick.”
Chinese demand, which has been “strong,” is likely to soften, he said. The Asian country imported 2.33 million tons of sugar in the first eight months of the 2011-12 season that started in October, up from 824,000 tons in the same period a year earlier, according to the International Sugar Organization in London.
Slowing Chinese imports are “the only bearish story,” Gordon said. Sugar traded in New York will average 21.7 cents a pound this year, down from a previous forecast of 22 cents a pound. The price will average 22.4 cents in 2013, up from a previous estimate of 19 cents, according to the report.