Sugar futures are still a “buy”, even after their 9% surge of the last session, Australia & New Zealand Bank said, citing factors including the world production deficit and the cut by funds of their net long position.
Raw sugar futures on Tuesday staged their biggest gain in New York since at least 1993, on a most-active contract basis, a surge attributed to a cocktail of factors, including technical factors, and an increase by the International Sugar Organization to its forecast for the world output deficit in 2015-16.
Other explanations proffered include talk of a squeeze on European white sugar exports, a call by Imperial Sugar for up to 500,000 tonnes of extra US import quota for raw sugar, and talk of port delays to Argentine deliveries.
“Observers are offering plenty of explanations for the rise,” said Tobin Gorey at Commonwealth Bank of Australia, adding that “traders will tell, or perhaps bore, their grandchildren with tales of this day”.
However, the rally in a contract which was, until this week, one of 2016’s worst performing commodities has still left room for further upside to prices, ANZ senior agricultural economist Paul Deane said.
“Even with the rebound, we view 2016 and 2017 futures prices as still undervalued,” he said.
Prices, which remain some 1 cent a pound below levels at the start of the year, offer a “potential buying opportunity given the medium-term fundamentals”.
Prices “should average 15-17 cents a pound in 2016 and 2017”, depending on extent of the world production deficit, with ANZ noting market estimates of 4m-8m tonnes as of late 2016.
A drawdown in stocks of some 4m tonnes is worth about an extra 1.3 cents a pound in average sugar prices, with 8m tonnes adding roughly 3 cents a pound to value prospects.
‘Key obstacle removed’
The bank flagged in particular the need for sugar to compete more strongly for cane with ethanol, which has become particularly attractive for Brazilian mills to produce thanks to tax and gasoline price changes.
“We question whether another year can pass where sugar is as unattractively priced for mills versus ethanol,” Mr Deane said, if saying that this effect may take some time to feed through, with Brazil’s cane crushing season not due to restart in earnest until April.
ANZ also stressed that one-time factors had driven prices “into undervalued territory”, with expectations of a large delivery of sugar against the expiring March contract, and weeks of hedge fund liquidation of long positions.
The removal this year of all but a slither of speculators’ net long in sugar “removes one of the key obstacles in positioning long into sugar on an anticipated price recovery later in the year on better fundamentals”.
May raw sugar futures stood 0.05 cents lower at 13.85 cents a pound in early deals.
(Source – http://www.agrimoney.com/news/sugar-futures-still-a-buy-even-after-biggest-price-jump-since-1993–9341.html)