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E-mailApril 2010: Morgan Stanley
Earlier this year front-month prices traded to near $0.30/lb (as we expected, seeSugar Update: Super Sweet, Oct 5, 2009). However, since then, prices have nearly halved. While we also anticipated that prices would decline as the Brazilian 2010/11 harvest approached, the magnitude of the decline has admittedly surprised us.
Sugar is Oversold
Despite better production from both Brazil and India, we still see a global deficit of 5.4 mln tonnes raw value (mtrv) in 2009/10 (better than our 7.3 mtrv estimate in Oct) and importantly see the global stock-to-use ratio at 16% - the tightest on record. Looking forward to 2010/11 crops, a Brazilian harvest of 40.7 mtrv (+15% YoY) and an Indian harvest of 25.3 mtrv (+30% YoY), will help in producing a global surplus of 5.9 mtrv; however, will still leave global stocks-to-use at a low 18.3%. Net, we see No.11 prices averaging $0.21/lb in 2009/10, with performance in the MYTD implying an average price through the end of the MY of $0.18/lb.
However, sugar lacks a near-term catalyst. In India, production of the larger than expected 2009/10 crop is only just finishing, tempering the need for imports until at least mid-summer, if at all. Russia, China and Pakistan also likely need to import; however, nothing looks imminent.
All eyes, as a result, are focused on Brazil, where the harvest is slowly getting started. Cooperative weather could pressure sugar, especially near-dated contracts with producers under hedged. However, the downside is likely to be modest as parity with ethanol is close. Unfriendly weather would present significant upside risk given already depleted inventories as well as a dearth of new production until the start of the Northern Hemisphere harvests in Sep/Oct.
We are reinitiating a long March 2011 sugar position, currently trading at 17.69 cents/lb. This is a position we first opened on Mar 25, 2009, and were stopped out on Mar 23, 2010 at 16.78 cents/lb.
Ends --
Download the Morgan Stanley report here:
 MS Sugar Update | 192 Kb |
