ANALYSIS-Sugar supply seen tight despite plantings boost

Published: 19 Nov 2009 17:27:02 PST

* Indian sugar output a wild card

* Brazilian mills seen making sugar rather than ethanol

LONDON, Nov 19 - A doubling of sugar prices this year will trigger a boost in plantings in 2010/11, but the economic crisis and expectations of a global deficit will keep supplies tight and prices high.

Raw sugar futures jumped to 28-1/2-year highs after India, the world's leading sugar consumer, swung to a net importer from exporter due to a poor domestic crop, and the Brazilian harvest was hampered by excessive and persistent rainfall.

ICE benchmark March raw sugar futures fell 0.31 cent or 1.3 percent to 22.99 cents a lb on Thursday afternoon.

The surge in sugar prices will lead farmers around the world to plant more, but financial constraints due to the credit crisis and competition from alternative crops, could limit planted area and yield.

"I think globally we are probably going to see a lot of producers like Thailand and Australia increase acreage just because prices are attractive," said Standard Chartered analyst Abah Ofon.

"I think that is going to contribute to bigger supplies."

Other analysts also anticipated a lag before the new crops added to global supply.

"I expect a real pickup in cane planting only in 2010/11," said Praful Vithalani, owner of Indian brokerage Jagjivan Keshavaji.

"High prices, a result of global and domestic shortages, are encouraging farmers to opt for cane. But since cane is a crop which needs 2-3 years to mature, the real rev up in planting will get reflected only in 2010/11."

One key variable was the outlook for sugar production in India and the impact of uncertain weather patterns.

"The big question mark is India," said Sergey Gudoshnikov, a senior economist with the London-based International Sugar Organization (ISO).

Sugar production is also set to rise in Brazil in 2010/11, after the rainfall eroded yields in the 2009/10 crop and left roughly 10 percent of the cane in the fields, analysts said.

"Rain has played havoc with the 2009/10 Brazilian crop and we have reduced our output estimates accordingly," said Peter De Klerk, senior analyst with London-based merchant Czarnikow.

"Brazilian mill expansions have been inhibited by the credit crisis, leaving substantial volumes of cane in the fields which will be crushed during 2010/11."

De Klerk said it was too early to make any meaningful forecasts for Brazilian 2010/11 output.

CREDIT CRISIS

The capacity of Brazilian farmers to boost plantings was hampered by the financial crunch, which will limit their access to credit lines.

"We do see some people trying to increase their crop, but credit is tight," said Alex Oliveira, senior sugar analyst for brokers Newedge USA in New York.

Sterling Smith, senior analyst for brokers Country Hedging Inc. in Minnesota, agreed that a problem facing Brazilian producers was securing adequate financing to bankroll any expansion.

"With difficulties in credit, I think we're looking at a lag," Smith said.

It is also not a given that farmers in Brazil or India would expand cane plantings given high prices, as some may opt to sow soybeans or even corn, especially with prices in both commodities having posted strong gains as well, he added.

Analysts said that robust demand for sugar and the limit on the increase in plantings after a big deficit year in 2008/09, augured for tight supplies and high prices next marketing year.

"We expect prices to remain well-supported until the beginning of the next season, at least April 2010," said Julio Maria Borges, director at Brazil's Job Economia consultants.

"International prices will likely remain sustained because supplies are low."

The high price of sugar will likely encourage Brazilian mills to produce sugar rather than ethanol biofuel from cane into 2010/2011, keeping sugar supplies tight.

"I think that because of better sugar prices than ethanol prices (in 2010), producers will try to maximise sugar production up to their full capacity," said Plinio Nastari, president of Datagro consultants in Brazil. (Additional reporting by Rene Pastor in New York, Inae Riveras in Brazil, Mayank Bhardwaj in India, and Nigel Hunt in London)