Sugar rally falters as Brazilian output recovers

Sugar futures received a – temporary – knock after industry data revealed an improvement in Brazil’s output, following a series of downbeat data.

Sugar production in Brazil’s Center South region – the biggest producing area in the top producing country – reached 2.58m tonnes in the first half of July, Unica, the cane industry associations, said.

The figure represented an increase of 2.5% year on year, an improvement on the 1.3% pace of increase seen in the second half of June.

The growth was not enough to question expectations that Brazil is on course for its first decline in sugar production in a decade, in part because of a later start to the crushing season this year, but also a hangover from two years of underinvestment which have left the country with ageing cane.

However, it reduced the rate of decline in sugar output so far in 2011-12 to 11%, from a figure of 15% at the close of last month.

‘Sugar prices to ease’

The immediate market reaction was to pull sugar futures into negative territory in New York, after an early run which had taken the October contract to 31.47 cents a pound, within an ace of a four-month high.

Indeed, the data acted as a rallying point for bears also banking on an easing in the queues of ships waiting to take on sugar in Brazil, which is also the world’s largest sugar exporer.

"Guess now that the news of reduced crop estimates for Brazil have made the rounds, and the delays in loading sugar in the port at Santos are expected to ease, sugar prices will follow," Jurgens Bauer at PitGuru said.

However, futures recovered amid concerns that the disappointing Brazilian output represents a sign of strategic problems, rather than just those related to poor weather.

The underinvestment in cane, which now has an average age of more than four compared with an ideal of less than three, is seen as one major concern, another being the competition for suitable, and accessible, land for expanding productions.

"With the market trending higher, the bears need a ‘story’ sooner rather than later as Brazil news still seems to favour the bulls," Thomas Kujawa at Sucden Financial said.

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