Falling Supply And Rising Consumption – Buying Sugar A Sweet Trade For Bulls

Lately, sugar prices have been pushed to almost-four-year high as the sugar market has been tightening due to output shortages and increasing demand. Not only is sugar production in key growing regions around the world expected to slump in the months ahead, but also the thirst for sugar in India is turning the world’s third largest producer of sweetener into a net sugar importer.

Surging domestic sugar prices in India have forced its government to levy a 20 percent duty on sugar exports to curb further gains in local prices. Indian sugar output is set to fall to the lowest level in seven years as drought conditions shrink cane acreage in the nation’s biggest growing regions such as Maharashtra and northern Karnataka.

A recent study by the Indian Sugar Mills Association (ISMA) estimates India’s sugar output at 25.1 million tons for the 2015-2016 season ending in September, which is equivalent to an 11 per cent drop compared to last year. Sugar output is estimated to fall further by 8 per cent to 23.1 million tons for the 2016-2017 season starting in October, down from 25 million tons this season.

Meanwhile, with consumption estimated at about 26.5 million tons, the country’s net-import amount in the next season will probably be 3 million metric tons. Traders are waiting for the removal of import taxes on raw sugar that would boost global demand and potentially support prices.

Sugar availability in Thailand – the world’s second biggest exporter of sugar, is also thin due to hefty demand recently from China and a prolonged and severe drought. According to the Thailand Office of the Cane and Sugar Board (OCSB), which oversees the country’s sugar industry, output in the 2015-2016 season is only 9.7 million tons, which is well below the 10.3 million tons in the previous season.

Demand from Asian countries such as China, Vietnam and Myanmar, which have had to face bad weather and falling domestic production, is raising the overall shortage. China imported up to 730,000 tons of Thai sugar in 2015, significantly above 2014’s figures of 200,000 tons. Myanmar also imported 390,000 tons of Thai sugar in the first half of this year, up from only 20,000 tons in the same period last year. Additionally, Vietnam is expected to import 200,000 tons of sugar this year in order to top up the national supply.

Against the background of output shortfalls from India and Thailand, and mounting demand from some countries, higher sugar production from Brazil and the EU is widely expected to rescue the sugar market from the severe deficit. Brazil is the world’s largest sugar cane producer and exporter. The country exported a record of 12.72 million tons of raw sugar in the first seven months, up 30% from last year and up 18% from the previous record for the same period in 2010, Trade Ministry data showed.

European sugar exports will come back to the market next year, as restrictions on production and exports will be lifted as part of Common Agricultural Policy reforms. European sugar is produced from beet, not from cane like many other tropical countries. According to the latest data from the European Commission, in 2016/2017 season, EU beet sugar production is forecast at 16.3 million tons, up 10% from 2015/2016 season.

Sugar

Fig: Sugar D1 technical chart

Sugar has been on a rise for a month after pulling back from near the 23.6% retracement level at 18.59. Since late August 2015, the commodity price has more than doubled. Sugar has either remained above the 20-day average or has not fallen below the 50-day average for nearly 1 year now. This indicates a strongly bullish market. Sugar can be expected to retest the record high level at 21.21 created on June 30.

Trade suggestion

Buy Stop at 20.80, Take profit at 20.90, Stop loss at 20.60

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