Brazil sugar producer turns futures buyer amid delays

Tue Jul 3, 2012
* Copersucar buys 2,216 lots, or 112,578 tonnes, of sugar

* Rainy weather delays cane harvest, sugar production

* Seen as precautionary measure to cover supply commitments
By Peter Murphy and Marcy Nicholson
BRASILIA/NEW YORK, July 2 (Reuters) - Top Brazilian sugar grower Copersucar S.A. has turned buyer, becoming what is believed to be the first producer to take physical delivery from the futures market in over half a century.

Copersucar will take delivery of 2,216 lots, or 112,578 tonnes, of sugar against the ICE Futures U.S. July expiry last Friday, Copersucar spokesman Guilherme Pena said, confirming market speculation. He declined to make any further comment. The delivery has a notional value of over $50 million.

That revelation triggered speculation about whether Copersucar's move reflected advance warning of a looming shortage in the global sugar market, something analysts say appears unlikely, or more likely a short-term supply squeeze for the company itself following unseasonably heavy rains in Brazil.

"It's a reflection of the situation in Brazil as far as the delay with the cane harvest and sugar production (goes)," said Michael McDougall, a senior vice president for Newedge USA.

He said it was the first time in at least 50 years that a sugar producer had taken delivery from the exchange.

Normally producers use futures contracts as a way to hedge production by selling contracts forward, shorting the market to lock in prices and, if necessary, delivering their own supply. Merchant traders like Cargill or, in rare cases, consumers are more likely to take delivery as a way to source supply.

Copersucar bought only a small percentage of the total deliveries that amounted to 21,737 contracts, or 1.1 million tonnes, marking the biggest delivery in three years. Cargill will take delivery of most of this, at 17,298 contracts, or 878,781 tonnes.

The volumes were also small relative to the size of the Brazilian firm, equivalent to less than six days' worth of its annual output.

As such, futures traders appeared unfazed by the appearance of a seller on the buy side. On Monday, benchmark October raw sugar futures rose a modest 0.39 cent, or 1.9 percent, to finish at 21.40 cents a lb, its highest close since April 30 but still down 8 percent since the start of the year.

Traders were surprised by the purchase. Some speculated the move was aimed to push up the price of sugar; one trader wondered if it was simply due to some kind of error.

Most agreed on one thing: "The majority of traders believe there is no shortage (of sugar)," said one New York trader.

WEATHER WORRIES DOG

Weather problems are dogging Brazil's cane harvest with unseasonably heavy rain since the crop's outset in April, delaying production and threatening to reduce total output of the sweetener, though a spell of drier weather has now begun.

A broad view of supply and demand this year suggests the market should still be comfortably supplied, with estimates for surpluses of 9 million to 11 million tonnes, but the slow start to Brazil's harvest means immediate availability is tighter.

"It's a short-term thing that reflects the situation of the day with the (immediate) lack of product," said Julio Borges, director and associate at Job Economia who saw the decision as a precautionary move by Copersucar to meet delivery commitments.

Brazilian cane industry association Unica said last week that the delays would push the bulk of this season's sugar production into the second half of the year. Its data put sugar production through mid-June at 28 percent less than last season. For details, see:

"Potentially, with the weather, sugar production is being adversely affected because the industrial yields are falling," said Newedge's McDougall, referring to the quantity of sugar in each tonne of cane.

He wondered whether that factor might prompt mills to produce more of sugarcane's other derivative product, ethanol biofuel, burned in millions of flex-fuel cars on Brazil's roads.

"Potentially the mix will be changed (in favor of) ethanol. Also the mills need the cash and they tend to produce the quickest product they can, which is hydrous ethanol," he said.

TRADING BRANCH

Copersucar is the trading branch of a cane producers' cooperative. Last season the company processed 7.6 million tonnes of cane which means the delivery it will receive represents about 1.5 percent of its throughput.

Prices have been boosted lately by delays at Brazilian ports due to the recent rains that have also disrupted harvesting.

Wet weather during the harvest brings a myriad of problems, preventing harvesters from operating in the fields, causing the plant to metabolize the sugar in the stalk and leading to a backlog of ships at the ports.

The queue of ships at the country's main ports handling sugar reached 70 during last week, not yet an alarming figure compared with a peak of more than 120 during a wet period in 2010. That queue and resulting weeks-long delays to deliveries coincided with a period of exceptionally strong immediate demand to push sugar futures to a 5-1/2-month high by August that year.

Forecaster Somar said the outlook in the main cane-growing areas in the southeast, was for mostly dry weather during the next fortnight, however the key sugar port of Santos was at risk of a brief spell of rain this weekend and heavier rains the following weekend with a dry spell in between.

"The interior should be drier. It's more on the coast (that there is a likelihood of rain)," said meteorologist Flavia Matiolo.

(Additional reporting by David Brough in London; Editing by Marguerita Choy and Carol Bishopric)