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Chinese sugar production forecast to reach 13.8 mn tons in 2011/12: Rabobank
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Rabobank expects additional downside movement of prices to spur more buying; stocks and supply lines have likely been drawn thin due to the elevated values. Counter to the rest of the world, China demand has remained robust throughout the past months. Imports in August reached the high levels anticipated by the market, with shipments reaching 423,794 tonnes, up 65% from the previous month.

Chinese Sugar demand will remain strong as the government engages in a restocking programme after having likely sold off close to 3.7 million tonnes in the past two seasons from reserves. Chinese production is forecast to reach 13.8 million tonnes in 2011/12 and the country’s deficit is pegged at 2.0 million tonnes. Imports will depend greatly on the government’s restocking, which will likely depend on the prices. While China’s buying will support the market as the most important import market, bank expects the better supply fundamentals to be the price‐driver for international markets.

“Raw sugar futures prices in NY tested the 30 USc per lb level again in September but were unable to reach it and fell due to a lack of buying interest, and while supply remains historically very tight, we expect a new season surplus of 7.3 million tonnes to result in further downside movement. We anticipate the falling prices to flush out more supply as we believe Brazilian producers have held some back on sales. The price on the futures market will retain a risk premium until a clearer image of Brazilian output is available as well as the progress of the beet harvest in the Northern Hemisphere but we think this has already started to erode.” the bank said in a report.

The open interest in raw sugar in NY continues to fall, touching lows last seen in 2006, while the fund share of the market remains high representing 26% of the total market. The lack of commercial interest, likely due to expectations of lower prices in the new season, has been a major cause for the weak price in the NY market. Bank expects speculator liquidation to result in response of better supply and this to add to downside price bias.

In the EU, domestic sugar prices remain high, and while this is prompting increasing calls for modifications to the bloc’s sugar policies, structural change is not expected to happen quickly, which leaves the market in need of one‐off moves by Brussels and susceptible to sustained high prices. The European Commission will publish a draft proposal on 12 October outlining the removal of the sugar production quota. Brussels suggests the measures will raise beet area and lower prices in the bloc, but the plan would not go into effect until 2016. The proposal does nothing to relieve the current tightness or the potential supply issues in the new season.

While output in the EU will increase significantly in the new season from 15.2 million tonnes to 17.5 million in 2011/12, the available domestic supply will not increase due to the production quota. Imports from the countries that the EU has given preferential duty‐free import access may not be able to meet expectations due to their own growing demand and the high international prices. Supply from the so‐called EPA/EBA countries has increased recently in response to the high EU prices: in the two weeks to 2 September, imports from the group reached 107,018 tonnes, up from 54,460 tonnes in the same period of the previous season, and total imports in the 2010/11 (Oct/Sep) season have now reached 1.69 million tonnes, up 300,000 tonnes from last season and higher than the EU forecast of 1.65 million tonnes.

The supply of the EPA/EBA regions is highly volatile and this risk is likely playing a major role in the current high prices. The high price situation in the EU has already resulted in major moves by Brussels in the current season to increase the supply of Sugar in the bloc, including the conversion of 500,000 tonnes of out‐of‐quota sugar back into the quota, 300,000 tonnes of additional duty free imports and a new 200,000 tonne duty free import quota. Prices have stayed stubbornly high as the market is likely anticipating the same dynamics in the new season, or at least pricing that risk in.

Prices are now likely tracking the international market due to the new reduced duty tenders that Brussels has had since July. The international raw price is EUR 440 per tonne, with EUR 100 for shipping and the reduced duty of EUR 275 per tonne resulting in the EU price of EUR 815 per tonne. The Commission may have to implement new actions to relieve the supply tightness that could occur in the new season, this may come in the form of changing out of quota sugar into in quota or more reduced duty tenders; the uncertainty is resulting in playing a major role in the high prices.

In the US, the tight sugar supply situation has kept domestic prices high and has prompted the USDA to allow imports under the TRQ to begin a month early. The ending stocks‐to‐use ratio for 2011/12 is now forecast at a historically low 9.8%, down from the 11.7% August estimate and 15.2% the previous season. The lower supply is a function of reduced beet production, which is forecast to reach 4.6 million tonnes and could be reduced further given the current state of the crop. The good or excellent share of beet in Minnesota fell to 49% from 51% the previous week. The small buffer stock suggests that international imports could be needed. If production does not meet expectations or demand increase, this risk is likely to support international values.

International sugar demand has picked up, but buying seems hand–to‐mouth, and further interest will be needed to support values. The recent price correction has encouraged deals, and Iraq, Egypt, and Tunisia came on to the market to buy, but the purchases were likely needed to cover short term demand, and many are likely waiting for prices to drop before securing supply.

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