Sugar Bulls Are Enjoying the Best Start to a Year in a Decade

(Bloomberg) -- As sugar traders gather in Dubai for one of the year’s most-important meetings, all the buzz is about the spectacular market turnaround that once seemed far out of grasp.

Futures have surged 12% in 2020 -- the best start to a year in a decade -- defying the spread of a deadly virus in China that’s sent everything from oil to copper to soybeans tumbling. And it’s all thanks to Thailand: The worst drought in decades has slashed the crop in the world’s second-largest exporter.

The Thai squeeze surprised traders at a time when the European Union was already producing less, Brazil had turned more of its cane crop into ethanol and freezing weather wrecked crops in North America. That’s prompted London-based commodities trader ED&F Man Holdings Ltd. to boost its forecast for a world sugar deficit this season by about 10% to 7.7 million metric tons after a surplus a year earlier.

“The main focus for the market right now is how bad the situation in Thailand is,” Enrico Biancheri, global head of sugar at Louis Dreyfus Co., told the Dubai Sugar Conference. “We see a situation in which Thailand can’t even supply its main market, which is Indonesia.”

Sugar output in Thailand will probably fall 30% from a record last year, according to the Thai Sugar Millers Corp. What’s more, there’s still no consensus on the size of the cane crop. While most traders now expect 80 million to 85 million tons, down from 130 million last year, some see even less.

“The situation is really, really bad,” said Mauro Angelo, the chief commercial officer at Alvean, the joint venture between Cargill Inc. and Copersucar SA that’s the world’s top sugar trader. “We have started to see the daily crush going down, and we’ve actually started to consider more like 78, 77” million tons, he said.

After spending much of 2019 in the dumps, sugar prices had already started recovering at the end of last year. A frost in North America reduced crops, redirecting sugar from Mexico that was originally supposed to hit world trade. And now Thailand’s woes are further fueling a rally even as traditional bearish elements like lower oil prices, the depreciation of the Brazilian real and the threat to China’s economy due to coronavirus pressure global markets.

Sugar futures traded in New York added 0.8% on Monday, their fourth-straight daily gain, to close at the highest level since January 2018.

“Despite all these negatives, putting it in perspective, this increase in sugar is even more spectacular,” Patricia Luis-Manso, head of biofuels and sugar analytics at S&P Global Platts, said in an interview in Dubai.

Brazil needs to direct more of it cane supply to sugar at the expense of ethanol to bridge the gap left by Thailand, said Marcelo de Andrade, head of soft commodities at Cofco International Ltd., a unit of China’s largest food company. With two months to go before the market gets new supplies out of the South American nation, “we still have a window to be constructive” for prices, said Luis-Manso of Platts.

The declines for Thai output were unexpected partly because many didn’t see a fall in planted area, with competing crops such as rice and cassava paying more. Others also blamed the sharp drop on poor plant husbandry after years of lower prices and a process of mechanization for the harvest, which usually leads to lower output at the start.

Brazil has already hedged about 70% of its sugar exports this year, much higher than normal, according to Cofco’s estimates. That could also add another bullish element, as it relieves selling pressure from futures markets. Even the threat of Indian exports is no longer as pertinent, with most traders saying the world now needs the 4 million tons the South Asian nation is expected to ship.

“The market really needs to find ways to draw out other supplies,” said Tom McNeill, a director at researcher Green Pool Commodity Specialists. “It’s got to draw more out of India, or it has to draw more stocks out of elsewhere, or it’s got to convert more sucrose into sugar in Brazil.”

The crop in Thailand may take two years to rebound, Cofco’s de Andrade said. For Green Pool, a slow recovery means a forecast shortage for next season will be wider than previously expected. Some traders, however, expect the market to return to a surplus starting from October.

“Is the Thai story priced in?” de Andrade said in an interview in Dubai Sunday. “I don’t think so.”

To contact the reporter on this story: Isis Almeida in Chicago at ialmeida3@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Millie Munshi, Pratish Narayanan

©2020 Bloomberg L.P.