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Sugar Futures Market changes from backwardation towards Contango

Tuesday, 13 April 2010

The futures market price curve for raw sugar was not long ago in "backwardation", whereby the price for nearby delivery was higher than that for future delivery. This is also called an inverse market, given that a normal condition for non-perishable commodities which have a cost of storage and finance is, all things being equal, for the price curve to increase over time. A futures price curve which increases over time is described by the technical term "contango". We have witnessed over the last few weeks a change in the market structure from backwardation towards contango. As at 12 April the nearby futures contract May-10 settled at US 16.54 c/lb, with July-10 higher at 16.85, Oct-10 at 17.36 and Mar-11 at 17.84. The curve is not in a full contango structure with futures contracts beyond Mar-11 at progressively lower prices.

This price curve reflects the fact that the short-term global supply deficit in the April-June period caused by India's import demand has largely passed with the current view being that India has comfortable future supply. The higher priced July-10 and Oct-10 futures contracts over the prompt contract suggests some level of uncertainty over supply in Brazil. The start of the harvest in Brazil has seen some rain interruption and according to LMC International's April Sugar Bulletin only 10 million tonnes of cane was crushed in March versus a target of 20 million tonnes. The market structure further out is predicting ample supply towards the end of 2011, 2012 and 2013.

The fall in the market from about 1 month ago in early March when the July-10 contract was trading at US 20 c/lb to its current level of US 16-17 c/lb is largely seen as a result of the marked change in expectations for Indian production. The LMC International bulletin suggests that India is, from a fundamental perspective, "at the centre of the sugar price collapse". The 2009/10 Indian harvest which is almost complete will exceed 18 million tonnes which is higher than the market expected. LMC suggests that Indian imports will be only 4 million tonnes after market expectations of 6-7 million tonnes.

Looking at the July-10 ICE No.11 raw sugar futures contract over the last two weeks, the closing price has moved sideways in this period from US 16.87 c/b on Friday 26th March to US 16.85 c/lb as at 12 April.

There has been recent supportive news with Pakistan announcing it will buy 200,000 tonnes of white sugar at a tender on 29th May. There is also a continuing view that the US will increase the sugar import quota to what sugar consultants Promar International describe as an "inadequate 300,000 tonnes".  And Russia will decrease its import duty from 1st May. At the same time however there are reports that India will reintroduce its import duty on white and raw sugar for reasons discussed above. Indonesia is also expected to increase import duties on white and raw sugar in April.

QSL continues to experience strong demand for nearby delivery for which supply is very tight.