Sugar may drop to a low in three to four months before rebounding as millers in top producer Brazil direct more cane to ethanol at the sweetener’s expense, according to RCMA Commodities Asia Ltd.
The millers will use 45 percent of their crop for making sugar, estimates Kingsman SA, a unit of McGraw-Hill Financial Inc.’s Platts. That’s down from a previous forecast of 47.5 percent and from 49.5 percent a year earlier. Brazil said last month it will give producers tax breaks to raise ethanol output, making the biofuel more competitive against gasoline and lifting domestic consumption. Rising demand and lower beet planting in Europe may also support sugar’s recovery, RCMA says.
“The question is when does the market bottom, when does it form an end to the cycle?” Jonathan Drake, chief operating officer at RCMA, said in an interview in Singapore last week, referring to sugar. “And probably that’s still in three or four months’ time. In 60 to 90 days’ time, we will see an increase in the hydrous ethanol consumption. The only question is that, is it enough?”
Sugar prices fell 14 percent in New York this year and reached a 34-month low on May 23 as supplies are set to outpace demand by a record 10 million metric tons in the 2012-13 season that started in October in most countries, the International Sugar Organization in London estimates. Prices also retreated in the past two years and a third annual decline would mean the longest price slump since 1992.
Ethanol sales in Brazil’s center south climbed 24 percent to 920.9 million liters (243 million gallons) in the first half of May, Sao Paulo-based industry group Unica said this week. Ethanol demand will continue to rise as the biofuel has now become more attractive to consumers compared with gasoline, Antonio de Padua Rodrigues, Unica’s technical director, said in a statement e-mailed on May 28.
The price of hydrous ethanol, the 100 percent biofuel used in Brazil’s flex-fuel cars, may need to fall to about 1,100 reais ($530) a cubic meter without taxes to ensure maximum consumption, Drake said. The biofuel is currently trading at about 1,250 reais a cubic meter (35 cubic feet), Drake said. Maximum consumption of hydrous ethanol will happen when the biofuel’s price is 60 percent of gasoline’s, he added.
“If the price is right, Brazil can consume all the sugar surplus in eight months,” Drake said, referring to the price of hydrous ethanol. “If the price is not right, then we still have all this surplus. The big, big thing for the sugar market is to see after a couple of months whether motorists in Brazil have increased the consumption of hydrous ethanol significantly.”
Hydrous ethanol prices in sugar equivalent are about 17.5 cents a pound, Patricia Luis-Manso, head of agriculture research at Kingsman, said in a separate interview in Singapore on May 27. That represents a premium of 4.5 percent over the raw sugar futures traded on ICE Futures U.S. in New York.
“If the premium persists through October, which is the majority of the current season, that would be enough incentive to decrease the sugar mix in favor of hydrous ethanol production,” Luis-Manso said, adding that the company’s current forecast for the amount of cane directed to sugar production could still fall to 42 percent from 45 percent now.
Sugar prices will also recover as demand increases by about 3.5 million to 4 million tons a year and production in some sugar-beet producing countries drops, Drake said. In Europe, cold weather delayed plantings, causing output to fall 600,000 tons from a previous forecast to 16.9 million tons, Kingsman estimated on May 24. Production in Russia will be five percent smaller at 4.35 million tons in 2013-14, the researcher said.
“In Europe, the plantings will be down, production will be a little bit down, partly because of the weather,” Drake said. “North America is the same issue. Even in places like Russia and the Ukraine, plantings will be lower. So beet sugar in general next year will have, it’s too early to know, but maybe several million tons less sugar.”
Weather in cane-producing countries may not be as favorable for crop development, according to Drake. Production in India, the world’s second-biggest grower, will fall to 22.2 million tons in 2013-14 on dry weather, Kingsman estimated. That is down from 24.8 million tons now.