June 12, 2012

The uncertain global macroeconomic environment continues to impact commodity markets – and the sugar sector is not exempt – with both investor confidence and demand weakening as the industry absorbs the shockwaves of the current market volatility.

Rabobank sugar analyst Tracey Allen says New York sugar futures have declined sharply in recent months, driven by a combination of factors. On the fundamental side, the progress of key harvests in India and Thailand have added to the growing consensus that the 2012/13 international crop year is likely to register a second consecutive surplus that Rabobank estimates at 8.1 million tonnes.

"Meanwhile the ongoing Eurozone crisis continues to tarnish investor confidence," Ms Allen says.

"Clearly such projections are preliminary and depend on assumptions regarding weather conditions – and there is an assumption of normal weather patterns. This is something that may also be called into question in coming months if recent concerns regarding a return of El Niño in the second half of 2012 prove justified."

The eagerly-anticipated 2012 Australian sugar crush has now commenced, with the majority of growing regions scheduled to begin crushing by mid June, and with favourable growing season conditions and a widespread replanting effort, both cane yields and sugar content are expected to rise.

Ms Allen says following a number of weather-affected seasons, the 2012 crush is expected to see Australian production revert to average levels or better.

Rabobank forecasts Australian raw sugar production to rise over 10 per cent year-on-year in 2012 to 4.63 million tonnes, while cane production is expected to rise 15 per cent year-on-year to over 32 million tonnes.

"Growing season conditions have been favourable, however the latest rainfall outlook from Australia's weather bureau suggests that a wetter-than-normal winter could be ahead for cane-growing areas," Ms Allen says.

"Rain has already delayed the start of the crush and the priority this season is to get as much cane off as soon as possible.

"Meanwhile, normal daytime temperatures can be expected, and while this outlook presents the preliminary risk of some early delays during the crush, most harvesters will be equipped to manage wet conditions."

Attention is also focused on the situation in Brazil, the world's largest sugar producer and exporter.

"On the Brazilian front, the public policy regarding ethanol and other fuels in Brazil continues to be the subject of discussion and speculation," Ms Allen says.

"If any new measures that could raise the consumption and or the profitability of ethanol were to be introduced by the government in the coming months, more of the Centre-South's cane could well be diverted into ethanol at the expense of sugar production, which could reduce Brazil's sugar output."

After the decline in cane output in 2011/12, preliminary estimates of the 2012/13 Centre/South harvest made earlier this year pointed to a slight increase in both cane area and cane yields, Rabobank reports.

However, the lack of rainfall in this area from February to March – a key period for cane development – delayed harvesting and raised concerns regarding the ability of cane yields to recover in the new season.

"With this in mind, UNICA's first projection of Brazil's 2012/13 Centre-South crop in mid-April was 509 million tonnes of cane, and this was three per cent higher than the previous year," Ms Allen says.

"Additionally, UNICA expects the sugar content of cane to be – two per cent higher than the previous year – with sugar production at 33.1 million tonnes, up six per cent on last year."

Overall, Ms Allen says, "the global macroeconomic environment remains very uncertain, and commodity markets in general could be vulnerable to any significant economic or financial shocks in the coming months, while weather shocks are likely to add upside to prices at this time of the season".

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 110 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 48 countries, servicing the needs of approximately 10 million clients worldwide through a network of more than 1600 offices and branches. Rabobank New Zealand is one of New Zealand's leading rural lenders and a significant provider of business and corporate banking and financial services to country's food and agribusiness sector. The bank has 32 branches throughout New Zealand.

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Denise Shaw

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Rabobank Australia & New Zealand
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Email: denise.shaw@rabobank.com

Jess Martin

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