Huge sugar discount spurs Brazil cane millers to stockpile

NEW YORK/SAO PAOLO Fri Aug 15, 2014 5:17pm EDT

NEW YORK/SAO PAOLO Aug 15 (Reuters) - Forward sugar prices are at their biggest premium to cash in nearly five years, prompting mills in Brazil and Thailand, the world's top producers and exporters, to hoard sweetener and keeping pressure on prices.

Brazil's biggest operators, Louis Dreyfus Corp's Biosev SA, Cosan SA and Sao Martinho , disclosed data this week that showed they are holding about 1.2 million tonnes of sweetener, significantly more than last year. They also said they are withholding nearby sales.

The discount of the front-month raw sugar contract to the second-month on ICE Futures U.S SB-1=R spiked as wide as 1.97 cents a lb on Friday, its biggest since December 2009.

The strategy by the producers is not unusual when prices are weak and supplies are plentiful. World prices have buckled under the weight of four straight surplus years. Benchmark ICE raw sugar futures on Friday hit a six-month low of 15.82 cents a lb.

A wide contango when forward prices garner a premium to cash encourages sellers to hang onto stocks, if the spread is high enough to cover financing and storage costs.

Bruno Lima, manager for sugar and ethanol at INTL FCStone in Campinas, Brazil, says the stockpiling has extended to Thailand, the world's second-biggest exporter.

He estimates inventories in Brazil hit 6.5 million tonnes by the end of July, 1.5 million tonnes more than a year earlier.

It's not clear when the hoarding started, but traders say it was likely spurred by hopes in the spring that low yields after a drought scorched crops earlier in the year would boost prices.

However, favorable harvesting weather has lifted production, sending prices to levels that are close to breakeven for many mills and causing the contango to double since the end of June.

The potential for a release of stocks is likely to weigh on prices in the near term, reinforcing concerns among traders that mills need to shutter capacity or close before the market recovers.

"It's interesting to see they're publicly saying it, but the action is not necessarily a solution to the problem," said Michael McDougall, a senior vice president for brokerage Newedge USA in New York.

"For every mill saying it's holding back, the weaker ones have no choice but to sell," said McDougall.

Many in the cane sector said they are also postponing ethanol sales until later in the April-March season on bets that the government will let fuel prices rise after the October presidential elections.

The bigger players' strategy may prove successful for them in the long term: drought is expected to bring an end to harvest a month earlier than usual in December and cut crushing by roughly 10 percent, according to traders. That would make supplies harder to find in early 2015. (Editing by James Dalgleish)

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