Sugar is on a High at Year’s Start

January 22, 2015
Wall Street Journal
By Leslie Josephs

 

 

 

Investors have found a sweet spot among plunging commodity markets: sugar.


 

"Prices Are Up About 10% Due to Brazil’s Weather and Taxes, While Most Commodities Are Down"

Raw-sugar futures are up about 10% this year, even as most commodities continue to decline. Sugar’s gains come amid dry weather in No. 1 producer Brazil, which is expected to result in the smallest global surplus of the sweetener in five years. Traders also cite higher fuel taxes in Brazil, which should convince drivers there to fill up their tanks with sugar-cane-based ethanol.

Some investors say the sugar market’s upswing underscores how prices for some commodities may be nearing a bottom after several years of declines. Producers of raw materials and agricultural goods ramped up output when prices were high, creating gluts in everything from sugar to iron ore to oil. But prices in some markets are at levels where miners, drillers and farmers can no longer turn a profit, leading to cutbacks. That, plus rising demand, could set the stage for a rebound in certain markets this year, including sugar, investors and analysts say.

Sugar futures ended Wednesday up slightly at 15.92 cents a pound on ICE Futures U.S., up from a more than five-year low of 13.50 cents in September.

Kevin Kerr, president of commodities-trading and consulting firm Kerr Trading International, said prices will likely rise even more later this year once the surplus shrinks. He recently placed bullish options for October, anticipating that futures will trade above 18 cents a pound by then.

“We see sugar prices significantly higher” in the last quarter of the year, he said.

The latest boost to the market came after Brazilian Finance Minister Joaquim Levy announced an increase in fuel taxes, a measure that analysts and producers say will increase demand for cane-based ethanol, of which Brazil is also the world’s top producer. Sugar futures are up 3.8% since the announcement on Monday.

Brazil has the world’s biggest fleet of flex-fuel vehicles, which can run on either gasoline or ethanol, and a tax on gasoline could make ethanol more attractive to consumers. The number of these vehicles in Brazil more than doubled between 2009 and January 2014, with roughly 21 million now on the road, according to the Brazilian Sugarcane Industry Association, or Unica.

The tax could lead to higher sugar prices because more cane may be diverted to the ethanol market, reducing global supplies of the sweetener, said Michael McDougall, a senior director at brokerage Newedge.

The International Sugar Organization expects production to surpass global demand by 473,000 metric tons, the least since the 2009-10 season, when the market was in a deficit.

“It means less supply coming from Brazil, potentially less exports. Obviously, prices could rally,” Mr. McDougall said. Brazil is the source of about one-fifth of the world’s sugar.

Some investors don’t expect the rally to last. With the global sugar market headed for yet another surplus, money managers as a group are betting on lower prices, according to data from the U.S. Commodity Futures Trading Commission. Prices have fallen below 10 cents a pound in the past before growers cut production enough to tighten supplies and trigger a recovery in the market.

“Overall, the fundamentals are still bearish,” said David Martin, founder of Martin Fund Management LLC. “The market has been oversupplied. That sugar has yet to be consumed by the market.”

Others have cut back on bearish bets, however. In the week ended Jan. 13, investors’ net futures-market bets that prices would fall totaled 49,049 contracts, 21% less than a week earlier, according to the CFTC.

Brazil’s industry is still reeling from years of low prices and dry weather that hurt the availability of cane. Since sugar prices began to crumble from a more than three-decade high in 2011, more mills have closed in Brazil’s main cane region than have opened, according to Unica. Farmers also are spending less on replacing old cane with more productive plants.

“We’ve seen the lows,” said Arnaldo Luiz Corrêa, a director at Archer Consulting in Santos, Brazil. “I think [sugar] prices are going to rise.”

 

Reference: http://www.wsj.com/articles/sugar-is-on-a-high-at-years-start-1421887240