Bad weather could reverse sugar price dip, warns Rabobank

By Guy Montague-Jones

- Last updated on GMT

Related tags: Economics, Commodity market

Rabobank has warned that the recent sharp dip in international sugar prices could easily be reversed if bad weather hits key producer countries.

In its “Sugar Quarterly” Rabobank drew attention to the rapid drop in prices in recent months. Between 7 March and 6 May, New York sugar futures for July 2011 fell 23 per cent.

The trigger for the decline was a dramatic increase in the production forecast for Thailand – the second biggest sugar exporter after Brazil.

But speculation had a role to play as well - as sugar was caught up in what Rabobank called “the general commodity sell-off” in early May.

Price predictions

So where are prices going next? Rabobank said a continued slide in prices is far from inevitable as sugar stocks are still low in historical terms.

There is the prospect of a larger global surplus than expected this year but Rabobank said global ending stocks and the stocks/consumption ratio for the year remain low. This makes the market vulnerable to any shocks from changes in crop predictions and bad weather.

Rabobank said: “Despite the short-term pressure on nearby prices, global stocks will remain at low levels by historical standards – as a result, the market remains vulnerable to one or more weather shocks in key countries.”

The agro-bank added that great attention is being paid to the early progress of the harvest in Brazil to see how prices are likely to evolve. At the moment it said opinions differ on the likely size of the cane crop.

And looking further ahead, the Indian sugar output for 2011/2012 could push prices back up. The initial suggestion had been that production would increase significantly but now Rabobank said it is expected that output could be around the same as it is this year. A lower than anticipated output could bolster world sugar prices.

Importance of the macro-economy

On the other hand, sugar could continue on its downward path. A lot depends on the macroeconomic situation and prices could go down irrespective of the sugar market fundamentals.

Rabobank said: “If funds decide to bail out some of their commodity market positions in response to fears that slower global economic growth will pull the rug out from underneath commodity prices, it may be hard for all commodity markets to resist the downdraft in the short term, no matter how constructive their individual fundamentals.”

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