Kingsman warns on sugar price, despite Brazil woes

2nd Jul 2012, by Agrimoney
Kingsman, even as it reduced estimates for the Brazilian Centre South cane harvest, warned against investors turning too bullish on the sweetener - unless an El Nino weather pattern takes hold.

The influential analysis group cut by 10m tonnes to 500m tonnes its forecast for the cane harvest in Brazil's Centre South – which produces approaching 90% of sugar in the top producing country.

"We now have two months of crushing under our belt – two months of atrocious weather and poor results," Swiss-based Kingsman said, in its third output estimate.

"Most mills have told us that they have no  intention  to  leave  cane  in  the  fields,  and  we  believe them. But if the weather is poor they may have no  choice."

The group cut its estimate for this season's sugar yield to 139 kilogrammes per tonne of cane, from a previous figure of 137.5 kilogrammes.

The forecast for Centre South sugar production was cut by 1.0m tonnes to 31.8m tonnes, showing only a small uplift from last season's result.

'Competing for lowest estimates'

However, this shortfall may already have been reflected in markets, with a widening premium of New York's, now expired, July futures contract over the October lot and, in physical markets, in the lower-than-expected June shipments.

"With the current good weather and the pick‐up in shipments that is expected for July it is probably safe to say that this reduced crop number will not affect nearby availabilities," Kingsman said.

As for New York futures, up 8% in the last seven trading sessions for the October contract, "we guess that [the changes] are already factored into the market – and would even suggest that the market is now 'trading' even lower estimates.

"Rather similar to last year analysts appear to be competing for the lowest estimates. They may once again over‐shoot to the downside."

Indeed, the medium-term forecast indicates dry and warm weather, which would rebuild cane sucrose levels.

A series of analysts have downgraded forecasts for Brazil's Centre South cane crop, with Macquarie three weeks ago cutting its forecast to 485.0m tonnes, implying a fall in production, although Datagro last week edged its estimate higher to 508.7m tonnes.

El Nino factor

However, Kingsman cautioned it would "undoubtedly" be forced to downgrade its harvest estimate further if El Nino conditions set in, and bring the rains from September onwards that they typically do.

A confirmed El Nino requires the so-called southern oscillation index, a measure of the air pressure differences between Tahiti and Darwin, remaining below -8 "for a sustained period".

"The current 30 day moving average is ‐13.1 which suggests that we are indeed on our way" to El Nino, Kingsman said.

Separately, at Texas A&M University, agricultural economist Mark Welch said that latest southern oscillation index data "increased the intensity and breadth of this fall's likely El Nino weather event".

He added: "The model continues to show El Nino extending past the January/February/March time frame."

New York's October raw sugar contract closed up 1.9% at 21.40 cents a pound.