March 13, 2015
Barron's by Alexandra Wexler | http://goo.gl/cdp8hW
It has been a sour year for sugar futures, and things aren’t likely to sweeten anytime soon. The price of raw sugar is down almost 13% this year, spurred by a slide in the value of Brazil’s currency.
Worries that the political and economic situation might be deteriorating in Brazil, the world’s top sugar exporter, have pushed that country’s currency to the lowest level seen in more than a decade. A weak Brazilian currency encourages growers and exporters to sell their sugar, because they get more of the local currency back when they repatriate their dollar-denominated profits.
“There are some in Brazil that are saying the real could head for four to the U.S. dollar, the low set back in 2003,” said Michael McDougall, head of the Brazil desk at Société Générale in New York. On Friday, the real was trading at 3.1659 to the dollar.
More selling from Brazil isn’t ideal for the global sugar market, which is already oversupplied. The International Sugar Organization expects record global sugar output in the year ending in September, raising its forecast for production to exceed demand by 620,000 metric tons, from 473,000 tons previously.
“TRENDS IN [THE SUGAR MARKET] remain down, as supply and demand estimates keep prices under pressure,” said Jack Scoville, vice president at Price Futures Group in Chicago. “The price charts show the potential for prices to go even lower as traders search for any demand.”
Raw sugar traded Friday at 12.70 cents a pound, its lowest price in nearly six years. Raw sugar for delivery in May on the ICE Futures U.S. exchange ended the week down 5.5%.
Adding pressure to the market are expectations that Brazil’s coming harvest could be better than last year’s.
“In Brazil, rains returned to the center-south [region] in February, providing some relief to cane crops after a drier than usual January and raising hopes for better yields for the harvest starting in April,” the ISO said in a note.
Those rains helped to dispel traders’ worries about a repeat of last year’s drought, which was the worst in decades. WeatherBELL Analytics said in a recent note that the rains are expected to continue in sugar-growing areas of Brazil over the next month.
The ISO expects center-south mills to crush 581.5 million metric tons of cane in the season that begins on April 1, an increase from the 570.6 million tons crushed in the current season through mid-February. About 43.5% of the cane crushed in the coming season is likely to be made into sugar, the ISO said, with the rest devoted to ethanol.
Brazil isn’t the only country adding to the global glut of sugar. India, the No. 2 sugar producer, is providing subsidies to exporters that will allow them to sell sweetener to the world market despite the low prices.
“At some point, [sugar futures] will offer excellent buying opportunities as they will be undervalued,” Judy Ganes-Chase, the head of commodity consulting firm J. Ganes Consulting, said in a note. But “for now, it seems like there is no end in sight.”