Sugar Prices Soar on Biofuel Prospects, Fund Flows
Date: 06-Oct-05
Country: UK / USA
Author: David Brough and Rene Pastor
But traders warned on Wednesday that if oil prices correct sharply downwards, sugar will take a dive too.
Raw sugar futures have surged by a third to almost 12 cents per lb this year, having stood at 9.04 cents at the end of 2004.
"Definitely, we're going to 12 cents," said Marius Sonnen of sugar trader Sonnen and Co. Inc. in the United States. "As long as oil prices are this high, the Brazilians will convert more cane into ethanol. I don't see any end in sight to this rally."
On Monday, the New York Board of Trade's key March raw sugar contract ended at 11.53 cents per lb in the highest close for sugar since trading near 12 cents in the mid-1990s. The contract touched a lifetime high of 11.91 cents on Tuesday.
Sugar futures have surged largely on expectations Brazil, the world's biggest sugar producer by far, will divert a bigger share of its record cane crop into production of ethanol for use in flex-fuel cars at a time of sky-high crude oil prices.
"It depends on how high crude stays to see how the sugar market develops," said John Ventre of Beresford Gabler Securities in London, adding sugar now looks overbought and susceptible to a speculative selloff to take profits.
James Cordier of Liberty Trading Group in Tampa, Florida, said: "If oil stays north of $60 per barrel, then you have a diversion of sugar into ethanol. Sugar's looking great. The only psychological hurdle is if oil prices fall."
Cordier said ethanol was the catalyst for the rally, and believes the March contract will eventually hit 12 cents.
A veteran London sugar trader said he saw dangers in the current giddy heights of sugar prices -- trade in the physical commodity has shrunk, and futures may have to slide to attract fresh buying interest.
But he said funds hold massive long positions in sugar futures as they diverted cash flows from strengthening equity markets, benefiting from the low cost of money.
"I believe we are trading a 'new' sugar market," he said, referring to the latest mix of ethanol and funds in the equation, and tightening credit lines to trade houses for speculative punts.
PHYSICAL CHOKED OFF
Jamal Al Ghurair, chairman of the Dubai refinery Al Khaleej, told Reuters last week that white sugar futures, dragged higher by speculators on the back of the rally in raw sugar, had reached such a high point that physical demand was choked off.
White sugar futures have nudged back towards a seven-year front-month high of $324 per tonne touched in July, and hit a contract high of $314 this week. December futures were down $1.00 to $300.80 on profit taking on Wednesday.
Traders said that while the focus of the market is ethanol and the funds, players should not lose sight of fundamental factors, notably the size of the 2005/06 Indian sugar crop, expected to recover strongly after a drought-hit harvest.
World sugar production is forecast to rise to 148.6 million tonnes in 2005/06 (Sept-Aug) from 141.8 million in 2004/05, largely due to the expected bigger Indian crop, analyst F.O. Licht said on Tuesday. [ID:nL04686550]
"The industry in Brazil continues with its unprecedented expansion policy, driven as it is by attractive export markets in Brazilian cost terms and a demand for ethanol underwritten by enthusiastic consumer confidence in new flex-fuel vehicles," Licht said.
Brazil's cane crop for 2005/06 is forecast at 406.2 million tonnes, less than expected earlier due to drought but still above the 384.9 million seen in the previous season.