ED&F Man Sees Sugar as Top Pick on First Shortage in Five Years

  • Market is tightening as white sugar premium widens to $117/t
  • Supplies to fall short of demand by about 2.5 million tons

Sugar is one of the best agricultural commodities as the global market is set to face its first shortage in five years, according to ED&F Man Holdings Ltd.

Production will trail consumption by about 2.5 million metric tons in the season that started in October, reversing surpluses from the previous four years, said Kona Haque, head of research at London-based ED&F Man, a trading firm that’s more than 230 years old. Futures traded in New York have fallen 14 percent this year partly as investors pulled out of commodities.

About 400 industry leaders are gathering for the Dubai Sugar Conference, a private event that starts Sunday. Haque will be moderating a panel at the event. 

Sugar was one of the few commodities that rose last year after a surplus of everything from grains to metals to oil sent prices falling the most since 2008. Prices increased 5 percent in 2015, the third-best performance in the Standard & Poor’s GSCI index of 24 raw materials after cocoa and cotton.

Tightness in sugar supplies is already being felt in the market for refined sweetener, where its premium over the raw variety rose to a five-month high of $117 a ton Friday. The so-called white premium is widening on stronger Chinese demand and El Nino-induced delays to crops in Central America, and is also increasing profits for refiners.

"If the white premium gets much higher from current levels onwards, it becomes economical for a lot of the refineries to start producing whites," Haque said in an interview at the company’s headquarters in London Thursday.

Another sign of limited supplies of refined sugar is the $13-a-ton premium that futures for March command over the next delivery month, the highest since the spread started trading in 2014. Traders will be watching how much sugar from Central America gets sold on ICE Futures Europe. The March futures expire Feb. 12 and London-based brokerage Sucden Financial sees the potential for a "sizable" delivery.

"Some of the major Central American producers’ yields have been impacted by El Nino and the late start to the crops, so we will need to see how much becomes available" on the delivery, Haque said.

China brought in a record 4.8 million tons of sugar last year and imports in 2016 could remain big as long as it’s profitable for refiners, Haque said. The Asian nation is also buying Thailand and Indian sugar smuggled mainly through Myanmar, according to Kingsman, a unit of McGraw Hill Financial Inc.’s Platts.

"Last year was big, we think it’s going to be big again," Haque said, commenting on Chinese imports. "A big unknown is whether they try to curtail the smuggling."

Brazil, the world’s largest producer, will start this year’s harvest earlier than usual as rains that disrupted the crop in 2015 mean cane will be left in the fields, Haque said. While a 30 percent devaluation of the real has boosted profits for Brazilian millers selling the sweetener in U.S. dollars, it’s not certain that millers will use a much bigger percentage of the cane to making the sweetener at the expense of biofuel, she said.

"It’s not a foregone conclusion that you will have a big sway towards sugar although it feels that way right now," she said. "Brazil once again is a swing factor and depending on currency, weather, sugar and ethanol prices, we could see sugar production ranging from 33 to 36 million tons."

"The latter, would obviously be quite bearish, but against that, we are seeing reductions in a lot of other major producers such as India, Thailand, Central America and the EU."

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