After four bitter years, sugar mills can look forward to sweeter prospects in 2016.
Prices have rebounded 50% since reaching a seven-year low in August. Raw-sugar futures traded in New York posted a 5% gain for the year, their first annual advance since 2010. The market has finally swung to a supply deficit after years of surpluses. And the commodity will keep rising through the first quarter of next year, according to the average of 18 traders and analysts surveyed by Bloomberg News.
While strong Asian demand is helping, the revival in sugar's fortunes can be attributed largely to one factor: El Nino. The weather pattern has cut the sucrose content in the sugar cane grown in Brazil, the biggest supplier, as well as yields in India and Thailand.
"The fundamental story supports prices at higher levels," said Donald Selkin, chief market strategist at National Securities Corp. in New York, who helps manage about US$3 billion of investments including commodities. "The market has anticipated the deficit and demand is increasing in developing countries."
Raw sugar for March delivery climbed 0.6% to close at 15.24 cents a pound on ICE Futures US in New York Thursday. Prices may rise as high as 16.3 cents by the end of the first quarter, according to the average estimate. Three of those polled expect prices to fall by March 31 while the rest expect the sweetener to rally further.
Indian exports
Global output will fall 4.3% to 178.9 million tonnes in the 2015-16 season, which runs from October to September in most countries, trailing demand by as much as 8.2 million tonnes, according to trader Czarnikow Group Ltd. A shortfall is expected for the season after that, according to researcher Platts Kingsman SA and the London-based International Sugar Organisation. The last time the sugar market had two straight deficits was in 2010.
Of course, sugar's rally could still be derailed, not least by the possibility of increased shipments from India where the government is pushing mills to make mandatory exports of as much as 4 million tonnes. And further pressure on the real would help Brazilian commodity exporters in foreign markets.
"The Fed's rate lift-off would put upward pressure on the dollar and downward pressure on commodity-market currencies," said Sameer Samana, a St Louis-based strategist for Wells Fargo Investment Institute, which oversees $1.7 trillion of investments. "The Brazilian situation is still very fluid, there's still a lot of uncertainty. It's hard to say that the real is out of the woods."
Jacyr Costa Filho, director of sugar producer Tereos Internacional SA, knows only too well the challenges posed by El Nino. The company's Guarani unit, Brazil's third-biggest cane miller, expects to crush 19.7 million tonnes of the plant in 2015-16, down from 20.2 million in the previous season. The decline is mostly because unusually heavy rain cut the cane's sugar content, spurring Guarani to stop harvesting early and leave untouched 400,000 tonnes of cane. "It wasn't worth the cost of processing," Mr Costa said by telephone.
Of the cane that has been harvested, Brazilian mills are using more to make ethanol after domestic demand for the biofuel jumped. Most cars in Brazil can run on gasoline or ethanol, and many consumers have switched to the latter after the government raised tax on the former this year. Ethanol also represents the quickest way for processors to monetise higher commodity prices after several years of struggle.
"As the ethanol goes out the mill's door, the money is credited to the account, which is not true for sugar," said Fabio Venturelli, chief executive officer of Brazilian sugar and ethanol producer Sao Martinho SA. His company's shares have surged along with the sugar price since September. "For those producers in need of cash, there's no doubt they will choose to produce ethanol."
Sugar production is also expected to shrink in China, to the lowest in a decade. The European Union will reap the smallest crop since 1971, according to forecaster FO Licht GmbH.
"There are upside risks to sugar over the long term." said James Govan, a London-based fund manager at Baring Asset Management. "We could be in a period of multi-year deficits in sugar."