Sugar rallies on weather concerns

Damaged crops from India to Brazil mean the world won’t have enough sugar for a second straight year.

Global demand will exceed output by as much as 5 million metric tons in the year through September 2010, leading to a record two-year shortfall, according to the International Sugar Organization in London. Parts of Brazil, the largest grower, are drenched by rainfall four times more than normal and too wet to harvest. India, the biggest consumer, had its driest June in 83 years and may double imports.

The number of options to buy sugar for delivery in March at 30 cents a pound, 44 percent higher than the Aug. 7 price in New York, has jumped more than 18-fold in four months. The rally is boosting expenses for food makers from Kellogg to Kraft Foods and increasing profits for Cosan SA Industria e Comercio, the largest cane processor.

“I haven’t seen sugar fundamentals being so severely unbalanced in my time,” said Adam Leetham, the Gurgaon, India-based director of Czarnikow Group who has been tracking the domestic industry since 1994. “It’s not just India. You see fundamental deficits in a number of large markets. It certainly looks like we will enter uncharted territory.”

Hedge funds and other large speculators more than doubled net-long positions, or bets prices will rise, to 206,330 contracts this year, the most since a record 240,792 in January 2008, U.S. Commodity Futures Trading Commission data show.

The 40-cent option:

Sugar surged 76 percent this year, reaching 20.85 cents a pound last week, the highest since April 1981. Bajaj Hindusthan, India’s biggest producer, predicts it may reach 25 cents by yearend, and Mizuho Corporate Bank estimates 30 cents.

The number of 40-cent call options for March 2010 has quintupled to 18,800 contracts in the past four months. A call contract gives the holder the right but not the obligation to purchase a commodity at a given price by a specific date.

Global use may rise 1.3 percent to 161 million tons in the 2009-2010 marketing year, surpassing production of 156.9 million tons and draining inventories, according to Macquarie Bank in London.

“Sugar is certainly going to go much, much higher during the course of the bull market,” Jim Rogers, chairman of Rogers Holdings, said in an Aug. 6 interview in Singapore. “Sugar is still 70 percent below its all-time high and not many things in life are 70 percent below what they were in 1974. Sugar has a wonderful future.”

Almost four decades ago, the commodity rose 16-fold over five years and reached a record 66 cents in November 1974. That year, global stockpiles fell to a 10-year low.

Since then, world production doubled before the recent supply squeeze. Oil’s 59 percent gain this year to $70.93 a barrel increased the value of ethanol made from sugar cane, and a 2.9 percent drop in the dollar against six major currencies spurred demand for commodities as hedges against inflation.

India will be a net importer for a second straight year, U.S. Department of Agriculture data show. This year, output has dropped in Thailand, the second-largest exporter after Brazil, and in China and the European Union.

Mexico, normally the biggest exporter to the U.S., set an import quota of 393,000 tons until December after the industry forecast an 11 percent drop in the harvest to 4.9 million tons.

In the U.S., consumption will total 11 million short tons (9.98 million metric tons) this year, as farmers produce 7.47 million, the government estimates. The ratio of inventories to total use in the year that ends Sept. 30 will drop to 11 percent, the lowest since 1975, USDA data show.

Opposing views:

U.S. food companies including Kraft, General Mills and ConAgra Foods asked the USDA Aug. 7 to raise import quotas.

Enthusiasm may fizzle as rising food costs and the first global recession since World War II reduce demand for sweets. The commodity also may fall should crops in India and Brazil exceed estimates.

“We are unconvinced that prices for sugar will stay this elevated,” analysts at Standard Chartered Bank said in an Aug. 5 report. “The market has rallied on investor flows due to weather concerns, policy changes in top consumer India and higher energy prices, strong fundamentals but vulnerable to sentiment change.”

The market also may “come off very quickly” if the dollar strengthens, said Nick Hungate, a senior trader for Rabobank International in London.

The U.S. Dollar Index, which measures its performance against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, reached the lowest level since September on Aug. 5.

At 18 cents a pound or more, consumption will slow, said Jonathan Kingsman, the chairman of broker and researcher Kingsman in Lausanne, Switzerland.

India’s consumption fell 2.3 percent to 23 million tons this year from the 2007-2008 marketing year and demand will be little changed next year, the USDA estimates.

“Global prices have gone beyond our reach,” said Prakash Naiknavare, the managing director of India’s Maharashtra State Cooperative Sugar Factories Federation. “We’ve put our import plans in cold storage for the time being. Either global prices have to move down or local prices have to rise sharply.”

Transactions in Brazil indicate supplies are adequate, said Mario Silveira, a senior risk management consultant for FCStone Group’s unit in Campinas. Shipments from Port Santos were 0.9 cent a pound less than futures on Aug. 5, about the same as a year earlier, he said. “It does not tell us we have a supply crisis in the Brazilian market,” Silveira said.