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Sugar Falls on Concern Surplus Will Overwhelm Ethanol Demand
By Shruti Date Singh
November 9, 2007
Bloomberg
Sugar fell the most in a week on renewed speculation that rising global production will overwhelm increased demand for the crop to make ethanol, after crude-oil prices fell from a record high this week.
The sugar surplus will reach 10.8 million metric tons in the year ending Sept. 30, 2008, up from 10.3 million a year earlier, the International Sugar Organization said Aug. 24. On Oct. 30, Switzerland-based analyst Jonathan Kingsman estimated an 11 million-ton surplus. Oil is down 2.6 percent from a record on Nov. 7, curbing demand for alternative fuels such as ethanol made from sugar cane in Brazil, the world's largest producer.
"If you are going to see any negative move in crude, you are going to see that reflected in sugar," said Rohit Savant, a commodities analyst with CPM Group in New York. "Fundamentally sugar is still bearish for the next one year or so. Crude is providing the support."
Sugar for March delivery fell 0.09 cent, or 0.9 percent, to 10.06 cents a pound at 11:03 a.m. on ICE Futures U.S., formerly known as the New York Board of Trade. A close at that price would be the biggest drop for a most-active contract since Oct. 31. The price has dropped 17 percent in the past year.
The rally in crude oil, which reached a record $98.62 a barrel Nov. 7, has attracted investors to commodities as an alternative investment. Sugar also has benefited because higher fuel prices will increase the amount of cane used to make ethanol rather than sweetener in Brazil.
Brazil has reduced the amount of sugar it makes and increased ethanol output.
Volatile Markets
The rise in open interest without a strong increase in prices may lead to some volatility in prices, said Michael McDougall, senior vice president for Fimat USA LLC in New York. Open interest, the total number of option and futures contracts that have not been closed, liquidated or delivered, has risen 55 percent over the past year to 779,447 contracts yesterday.
"The open interest continues to build, passing 770,000, and the market is hardly moving," McDougall said in a report today. "Is this setting the market up for a fall or is it ready to blow?"
With the dollar still falling and the possibility of crude oil reaching $100 a barrel, "the odds would seem to be stacked at a break of the 10.5 level and a price extension higher," McDougall said. "The price projection of a close above 10.5 points to a rally to 12.5 cents a pound," he said. "However, a break of the 10.07 level would signal a potential pullback."
