The past two weeks have seen global sugar prices plunge by roughly a fifth, mostly on news of Thailand's record output projections.
New York raw sugar futures for July 2011 delivery settled at 20.47 cents a pound on Friday against corresponding front-month contract prices of 25.48 cents on April 21 and the 30 cents-plus levels of early March (the peak 35.31 cents was reached on February 2).
Having stabilised below 30 cents by the second week of March and 25 cents after April 25, raw sugar is now apparently set to breach the next resistance level of 20 cents a pound. The impetus here is coming mainly from Thailand, which is seen to produce around 9.8 million tonnes (mt) in 2010-11 (October-September), up from the preceding season's 7.2 mt.
In addition, there are macroeconomic factors, not specific to sugar, contributing to a general bearishness. These include the US Fed's likely withdrawal of its “quantitative easing” programme – reducing the quantum of excess dollars that can be poured into commodities – and recent monetary tightening measures by China and India.
Ethanol diversion factor
But for all these bearish cues, there might still be an offsetting force that could hold up sugar in the coming months. And that relates to the extent of diversion of sugarcane in Brazil towards manufacture of ethanol.
In 2010-11 (April-March), about 55 per cent of the cane crushed by the world's No. 1 producer was used for ethanol production. That proportion, in the new season, has so far been 65 per cent, which, in turn, raises doubts over Brazil's sugar output touching the originally forecast 34.6 mt (based on a 55 per cent cane utilisation for ethanol).
Currently, the industry in Brazil is finding it much more profitable to produce ethanol over sugar, with realisations of around 2,381.5 real or $ 1,470 on every cubic metre (kilo-litre) sold domestically.
Given that one cubic metre of ethanol is equivalent to 1.7651 tonnes of recoverable cane juice and 1.0453 tonnes of juice yields one tonne of raw sugar, the equivalent realisation in raw sugar terms works out to $ 870.58 a tonne.
To this, if freight and stevedoring costs of $60 at Paranagua or Santos port are added, the free-on-board raw sugar equivalent price of ethanol comes to $ 931 a tonne or 42.23 cents a pound. Moreover, this raw sugar is of VHP or very high polarisation quality.
Discounting for the polarisation premium of 4.05 per cent, the effective price, comparable with the raw sugar traded in New York, would be 40.56 cents a pound.
To put it simply, if raw sugar is today selling at 20.5 cents a pound in New York, the corresponding raw sugar equivalent price of ethanol – derived from current ex-mill realisations in Brazil – is almost double.
Parities reversed
The accompanying chart shows that till around the third week of March, the parities were just the reverse, loaded in favour of sugar. Since then, sustained crude oil prices of above $100-a-barrel have shifted the economics to the side of ethanol, as realisations shot up from 1,550.7 real to 2,725.7 real a cubic metre between March 20 and April 20 and settling thereafter to 2,381.5 real.
The impact of all this on Brazil's sugar production will be known in the next few months, depending on what mills do with the juice obtained from crushing cane – crystallising it into sugar or fermenting to ethanol.
“We have the flexibility both ways. Our mills have sufficient crystallisation capacity to convert 70 per cent of the cane into sugar or, alternatively, produce up to 80 per cent ethanol, as we are now doing,” said Mr Narendra Murkumbi, Managing Director of Shree Renuka Sugars Ltd, which controls two companies in Brazil with a combined cane crushing capacity of 14 mt.