StanChart Recommends Buying March 2015 Sugar Futures on Shortage

Standard Chartered Plc recommended buying sugar futures for March 2015 delivery as dry weather in top producer Brazil threatens to cut output, potentially tipping the market into the first shortage in five years.

Global supplies may fall short of demand by 1 million metric tons in the 2014-15 season that starts in October in most countries, the bank said in a report e-mailed today. That follows four consecutive years of surpluses. Traders should buy futures for March 2015 delivery, currently trading at 18.39 cents a pound, targeting a gain to 22 cents, and selling the sweetener if prices fall to 16 cents, according to the report.

“Consumption could outstrip production in the coming season, leading to a draw down in inventories that were built up over four consecutive years,” said Abah Ofon, a Singapore-based analyst at the bank. “Current weather concerns and their potential to dent production in 2014-15 reinforce our view that price risks in the second half of 2014 are to the upside.”

Raw sugar futures traded on ICE Futures U.S. in New York rose 14 percent in February, the biggest monthly gain since June 2011. Prices rallied as drier-than-usual weather in Brazil’s center south, the country’s main growing region, threatens to reduce this year’s crop that starts next month. Temperatures in Sao Paulo state reached the highest in 10 years in January and February, according to Standard Chartered.

India, the world’s second-biggest producer, and Thailand, the second-largest exporter, are also experiencing dry weather, which could cut global supplies further, Ofon said. The potential for the development of an El Nino weather pattern could also reduced output. In 2009, India’s monsoon was “adversely affected” by an El Nino, spurring a drop in output of more than 40 percent and triggering a price rally, he said.

‘Deeply Concerned’

“We remain deeply concerned about the potential for a relatively weak 2014-15 harvest in Brazil, which coupled with dry weather conditions in India and Thailand, could collectively create a deficit,” Ofon said. “High sugar-production costs in Brazil and a smaller exportable surplus in India going into the 2014-15 season suggest limited downside for prices.”

While prices may still fall for now on ample supplies, the bank maintains a bullish stance for the second half of the year, according to the report. Prices will average 16.5 cents a pound in the first quarter and 17 cents a pound in the following three months, down from a previous forecast of 18 cents and 19 cents respectively, Ofon forecasts. Futures will then rise to 20 cents a pound in the second half of the year and to 24 cents a pound in 2015, he said.

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