Can history repeat itself a third time in sugar?

Can history repeat itself a third time?

Standard Chartered has challenged consensus thinking on sugar prices by forecasting that futures in the sweetener will enjoy an early-year rally in 2012 too, despite acknowledging hopes of – this time – a significant production surplus.

Most analysts foresee prices showing a steady decline from current levels, with the StanChart seeing New York’s near-term raw sugar contract averaging 26 cents in last three months of 2011.

On Friday, the spot October contract stood at 29.39 cents a pound, down 0.7% on the day, with the December lot shedding 0.8% to 28.51 cents a pound.

October 2011 vs March 2012

However, while many observers foresee the decline continuing into next year, as the market feels the effect of better output in Europe, India and Thailand, StanChart analyst Abah Ofon foresees futures rising – as they did in 2009 and 2010 too.

Mr Ofon on Friday upgraded his forecast for prices in the first three months of 2012 by 4 cents to 30 cents a pound.

Rabobank earlier this week estimated the figure at 21 cents a pound, while Barclays Capital last week said prices would "ease through the fourth quarter of 2011 and into early next year".

"We recommend selling the October 2011 contract on rallies and buying the March contract on dips," Mr Ofon told investors.

Wrong place

His recommendation comes despite an estimate that world sugar production will exceed output by 6m-7m tonnes in 2011-12, higher than many other forecasters, including the International Sugar Organisation, which on Thursday pegged the figure at 4.2m tonnes.

"But while there will be a global surplus, the supplies will not really be where they need to be," Mr Ofon told Agrimoney.com.

"There is going to be a lot of movement in sugar, and there will be bidders for this."

He cited in particular demand from China, which will see consumption, boosted in particularly by food processors, exceeding domestic production by some 2m-2.5m tonnes in 2011-12, "with imports making up the deficit".

Furthermore, he highlighted likely support from investors, "who have been very bullish on sugar, and I do not see that falling off a cliff".

China imports

The comments follow an ISO assessment that sugar values were unlikely to collapse, despite the world’s return to surplus.

The organisation also cited strong Chinese imports, which it saw rising by 14% to 2.1m tonnes in 2010-11 and by a further 30% to 2.75m tonnes in the following season as it replaces run-down inventories.

Many markets show seasonality in pricing, with prices of, say, different meat cuts reflecting demand for the barbecue, or Christmas.

Grains often fall into harvest, pressed by the prospect of fresh supplies, while sugar’s rise early in 2010 and 2011 has been attributed to it being the off-season for Brazilian production, which tends to ramp up again around April.

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