The global sugar surplus is forecast to more than halve into next season, and prices look set to ease by the end of the year, according to a Reuters poll of 17 analysts issued on Monday. The key questions for the global sugar trade in 2012 will be whether cane output in top producer Brazil recovers after a production setback, when and how much Brazilian cane will be converted into ethanol biofuel instead of sugar, and the outlook for exports from number two producer India.
"The surplus will have to be resolved," said Jonathan Kingsman, managing director of Lausanne-based consultancy Kingsman SA. "This may be through a fall in world prices big enough to persuade millers in the centre-south of Brazil to produce more ethanol and less sugar."
According to a median of forecasts taken in the poll, the global sugar surplus will stand at 7.97 million tonnes in 2011/12 and slip to 3.2 million tonnes in 2012/13. This compared with a forecast in the previous Reuters sugar poll, taken in July, of a 7.3 million tonne surplus in 2011/12. Favourable weather and prices have led farmers to boost plantings and big harvests have appeared across Europe, as well as in key producers India and Thailand. Buster Oxley, managing director of Sugaronline, said he did not expect a big recovery in production in Brazil, which reported disappointing yields due to older cane plants and adverse weather.
"We don't see a dramatic turnaround in the Brazilian crop as the fall in production last year was due mainly to an ageing sugarcane crop," he said. "We don't see any evidence of new crops coming through or even the investment for new crops, which will take another two years before their benefit will be reflected in production results."
The Reuters poll predicted a median ICE benchmark front-month raw sugar price of 22.00 cents a lb at the end of the first quarter 2012, as the new centre-south Brazil harvest kicks off, and 23.90 cents a lb at the end of 2012. Front-month raw sugar futures finished 2011 at 23.30 cents a lb. ICE front-month raw sugar futures stood at 24.90 cents a lb, up 0.01 cent or 0.04 percent, on Monday morning.
The poll forecast NYSE Liffe front-month white sugar futures prices of $590 per tonne at the end of the first quarter 2012, and $600 per tonne at the end of 2012. Front-month white sugar futures finished 2011 at $602 per tonne. NYSE Liffe white sugar was up $4.2, or 0.7 percent, to $649.80 per tonne on Monday morning.
Analysts said a major driver of the market outlook in 2012 would be how big an influence the price of ethanol will be in Brazilian mills' decisions on whether to allocate cane to sugar or ethanol production. Analysts estimate the so-called "ethanol parity" - the sugar price at which mills would convert cane to ethanol instead of sugar - at some 19-21 cents a lb.
Several analysts said ICE raw sugar futures could potentially test 20 cents a lb in the first half of 2012. Uncertain weather patterns could easily upset the best laid sugar price projections. "The anticipated surplus is a bearish force, but possible crop disruptions remain a potential risk," said Emmanuel Jayet, head of statistics and research at Sucden.
WEATHER IMPACT The impact of the weather phenomenon La Nina was a key variable, potentially affecting sugar supply. "La Nina would exacerbate the dryness in the centre-south of Brazil, delaying crop maturation and crushing," said Kona Haque, head of agricultural research at Macquarie SecurReuters "But if we switch to El Nino (which is typical after La Nina) from mid-year onwards, then you could get wet conditions, which would affect sucrose content in the cane." La Nina is a weather phenomenon usually linked to heavy rains and flooding in the Asia-Pacific region and South America and drought in Africa.
Analysts said investment funds' involvement in sugar futures could diminish as uncertainty over the global economic outlook and the euro zone debt crisis, increased risk aversion. "Investment appetite has shrunk on wider economic fears but will bounce back if these diminish and if the supply-demand situation becomes tighter than expected," said Gary Mead, Editor of worldcrops.com Kingsman said that many investment funds had a difficult year in 2011, and will need to prove to their investors that they can add value in 2012. "If they don't, then we expect investors to continue to withdraw capital," he said.