Rough weather sparks global sugar shock

Sugar futures may triple to the highest price since 1974 as a "perfect storm" of technical and fundamental indicators come together, said Martin Snow at commodity broker PFGBest.

Raw-sugar futures may jump to US66c (91c) a pound in New York before June, expanding a 2009 rally that sent prices to a 28-year high this month, Snow said.

The price has gained 94 per cent this year as adverse weather hampered harvests in Brazil and India, the world's largest producers, threatening to extend a global-production deficit into next year.

"India is having the worst monsoon season in seven years, so they've got a crop-shortage problem until next year," Snow, a senior commodity specialist, said.

"Brazil has some weather problems themselves, so they're not able to fill the gap. You've got a set-up for a perfect storm, in terms of price construction, at least between now and going into the [northern hemisphere] summer next year."

India, expected to import 6 million metric tonnes this year, will need more in 2010 to make up for cane-crop declines, analysts and traders said.

The world's largest consumer of sugar will permit duty-free imports of white sugar until May or June, extending an earlier exemption, Farm Minister Sharad Pawar said. Last month, the duty-free window was widened to November 30 for refined sugar and March 31 for raw stock.

Demand from other countries, including Russia, Pakistan, Egypt, Indonesia and Japan, may also support prices before Brazil's next harvest.

In Brazil's Center South, which accounts for about 90 per cent of the nation's sugar output, production this year will trail earlier forecasts as the heaviest rainfall in more than two decades delays harvesting and reduces yields.

Unica, a Brazilian industry association, forecast output of 29.35 million tonnes from the Centre South, down 5.9 per cent from an April estimate. The region produced 26.7 million tonnes a year earlier.

While next year's crop may be bigger, supplies for export may be limited as mills juggle domestic needs and demand for ethanol, analysts said. The biofuel is made from cane in Brazil.

Compared with 1974, when prices shot up fivefold, and 1980, when they tripled, sugar was relatively stable for the past 20 years. A rally that began in late-2005 brought futures to US19.73c a pound in February 2006 but faded by August.

After taking out the 2006 high, "the market has nothing to look for going all the way back to the 1970s and 1980s", Snow said. By August this year, prices shot past the US19.73c peak of 2006.

Sugar "broke clearly above it, closed above it and stayed above it", Snow said. "That's technically very strong."

Sugar may either top the 1974 high of US66c a pound in the next nine months or form a so-called double top, where prices match that level and then fall, Snow said.

"And if that's case, it will come down very quickly."

- BLOOMBERG