Sugar’s 86% Price Jump May Spur Surplus, LMC Says

Aug. 18 (Bloomberg) -- The 86 percent surge in sugar prices this year will encourage farmers worldwide to increase plantings, potentially leading to a large surplus in two years, said Martin Todd, managing director of LMC International Ltd.

“We will see a very healthy response,” said Todd from LMC, an Oxford, England-based advisory company for agricultural commodities. “We’ll be looking at production surpluses again,” he said in an interview in Bangkok.

Sugar has soared to a 28-year high as India, the biggest user, had its driest June in 83 years and parts of Brazil, the largest exporter, had rainfall four times more than normal, making the cane too wet for milling. World demand may exceed supply by 5 million tons in 2009-2010 after a record deficit of 7.8 million tons in the current year, said Peter Baron, executive director of the International Sugar Organization.

The market may show signs of “substantially cooling off” early next year with the first forecasts for India’s 2010-2011 crop, said John Reeve, director for agricultural commodities at Standard Chartered Bank in Singapore. Any price spike above 15 cents a pound has usually been followed by “a big sell-off within 18 months,” Reeve said in an interview.

The most active futures contract in New York has stayed above 15 cents a pound since early June, reaching a peak of 23.33 cents Aug. 12. Sugar for delivery in October 2011 now costs almost 5 cents a pound less than October 2009, showing traders expect a price decline.

Supply Response

Not all traders are betting on a price drop. The number of options to buy the commodity for March at 40 cents a pound in New York has jumped six-fold in less than five months, according to data compiled by Bloomberg. A call option gives the right, not the obligation, to buy a commodity at a set price.

The sweetener may climb a further 80 percent to as high as 40 cents a pound, Singapore-based hedge fund manager Michael Coleman said in a Bloomberg Television interview Aug. 14.

“Sugar is caught in a perfect storm,” said Coleman, 49, managing director of Aisling Analytics, which runs a $1.4 billion fund invested in energy and agricultural commodities. There’s “a big hole” in supply and no obvious solution in the next six to nine months, he said.

“Is there a possibility of reaching 40 cents a pound? Certainly,” said Coleman, whose fund returned 24 percent in 2008. “From this point on, it depends how price affects demand.”

The rally may prompt farmers in Brazil, the biggest producer, to harvest a “bumper” crop as cane output jumps by as much as 35 million tons in the year starting May from 600 million tons this year, ISO economist Leonardo Bichara Rocha said in Bangkok.

Indian Harvest

Sugar production in India, the second-largest grower, may be as high as 18 million tons in the year from October after rains, S.L. Jain, director general of the Indian Sugar Mills Association, said today. That’s more than a 16.5 million ton prediction last week from the Maharashtra State Cooperative Sugar Factories Federation Ltd.

In two years time, Indian output may jump as much as 52 percent to 25 million tons, according to Prakash Naiknavare, managing director of the federation.

Thailand, the second-biggest exporter, could boost production by 6.3 percent to 7.64 million tons in the year from December, and by 10 percent in the following year, according to Prasert Tapaneeyangkul, the secretary-general of the Office of the Cane and Sugar Board. Exports may climb to 5.74 million tons in 2010 from 5.29 million tons this year, he said.

Australian Growth

Australia, the third-largest exporter, may increase production by as much as 250,000 tons from 4.5 million tons in the year beginning July 2010, Ian Ballantyne, chief executive officer of Brisbane-based Canegrowers, said Aug. 13.

Still, heavy rain or drought may hamper growers’ ability to increase production, LMC’s Todd said yesterday.

Brazil’s sugar mills have been processing “34, 35, 36 million tons” of cane every two weeks, said Todd. “They should be able to do 40 million tons.” Delays in the cane harvest limit the capacity of mills to produce more sugar and set back planting of the next crop, he said.

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

The most active contract in New York has dropped 4.5 percent in the past four trading days to 21.93 cents today.