JP Morgan allays panic over sugar market as BTG Pactual sees further depression

Multinational investment bank, JP Morgan has allayed swelling panic over sugar market trend, saying prices offered good value.

It advised buyers to step in even as BTG Pactual issued a bit more downbeat assessment, forecasting prices in 2018-19 at their weakest in 12 years.

Both banks agreed that the worst was over for sugar prices which as measured by New York raw sugar futures were at a multi-year low set last week, down 29 percent so far in 2018.

“The good news is that prices may be close to a floor,” Sao Paulo-based BTG Pactual said, heralding revisions to its ratings on shares in cane processors such as Sao Martinho and Adecoagro.

JP Morgan said “recent closes above important technical levels,” such as 11.41 cents a pound for the New York July contract, “signal that a bottom is forming”.

“The slowdown in producer selling below 11 cents a pound, and limited investor appetite to add fresh shorts, indicates that the market is approaching trend exhaustion ahead of Monday’s May 2018 contract expiration,” it added.

However, BTG Pactual, forecasting a world sugar output surplus of 5.52m tonnes this season and 5.19m tonnes in 2019-20, was more downbeat over the prospects of a price revival, saying “prices may stay at about 11-12 cents a pound for another year”.

In fact, the bank forecast prices averaging 10.5 cents a pound in 2018-19, down 3.0 cents a pound year on year, and the lowest season-average value since the 10.4 cents a pound recorded in 2006-07.

BTG Pactual, flagging a wider world output surplus, highlighted the prospect of only a small reversal in Indian output in 2018-19 to 30 million tonnes from the record high of 32 million tonnes expected this season.

Meanwhile, Thailand is expected to produce over 14million tonnes next year, and the European Union is now expected to keep producing above 20million tonnes, keeping the bloc as a net exporter.

JP Morgan, however, restated expectations of New York sugar prices reviving to average 15.0 cents a pound in the October-to-December quarter, and 16.0 cents a pound or more in mid-2019, flagging the prospect that the Brazilian Centre South cane crush may not extend its better-than-expected start, as revealed in industry data last week.
“Limited April rainfall will weigh on agricultural yields,” JP Morgan analyst Tracey Allen said.

Furthermore, while tumbling Brazilian ethanol prices have cut some parity, the level at which the biofuel and sugar are equally attractive financially for mills to manufacture from cane, the biofuel, remains at a significant premium to sugar.

JP Morgan estimating ethanol parity at 13.9 cents a pound in sugar terms for anhydrous ethanol and 13.5 cents a pound for hydrous believes weaker prices of the biofuel would boost demand and support prices.

“We anticipate that the recent weakness in the parity will ease and that mills will continue to maximise ethanol output from cane, at the expense of sugar volumes. We consider that the balance of price risks for sugar prices from current levels is skewed to the upside, and maintain our recommendation on upside call option structures. Prices across the curve offer good value to consumers to take advantage of.”

Best-traded raw sugar futures for July in New York stood up 0.7 percent at 11.60 cents a pound in late morning deals on Monday, taking to 6.2% their recovery from last week’s low of 10.93 cents a pound, which was the lowest for a nearest-but-one contract in nine years.

London white sugar futures for August gained 0.2 percent to $328.10 a tonne, up 5.4 percent from last week’s low of $311.40 a tonne, the weakest for a spot contract since late 2008.