London Sugar : EU strict regulation
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06/12/2012 | 12:29pm
Opinion : Bullish above 560
Target price : 640
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Despite European crisis, the EU market is still the second largest consumer of sugar. But the EU regulation is restricted and complex in order to protect their farmers.
In fact, before 2007, in Europe, there was a legal minimum beet price guaranteed by the Common Agricultural Policy. This price was such a level that refiners were obliged to sell the refined sugar at a higher price in order to keep their margin. Furthermore, farmers made the most of it because they earned a lot. The problem was that production was not absorbed by the European market and its excess supplies were dumped onto the international market. This created imbalance on the world market. In the context of the World Trade Council, this was not acceptable. Thus, the EU had to reform its regulation.
The main goal of this reform was to reduce the European production in order to avoid imbalance. To do so, the EU decided to lower the minimum guaranteed price paid to farmers. The EU also decided to limit EU sugar consumption for the food channel from EU source beet to 80% and 20% would be imported from preferred countries. Thus, any excess production of sugar would have limited sale channels such as bio-ethanol or exportations. The EU thought European price would always be above world prices.
Yet, in early 2010, the India sugar harvest faltered and a problem happened. The situation was reversed : the preferred suppliers had no reason to export in Europe because sugar price was lower. This time, it was the European market which was unbalanced and tightened. 20% of the supply was missing and European producers had more incentive to export outside of Europe.
The risk is that we could have the same situation again, after bad news from Brazil. In fact, the world largest sugar exporter and producer, is losing market share. Its power is at risk after a wet month of May. Unfavorable weather hampered the sugar harvest until June 8, cutting also the quality of cane sugar. Since April, rain exceeded 25% of the season average in the region of Sao Paulo. In mid-May the total crush of sugar cane was 40% lower year-over-year, according to Brazilian Sugarcane Industry Association’s (UNICA) report. This risk could be balanced by Thailand’s supply, which this year might beat a new production record. The country, second largest exporter should produce between 10.5 and 10.7 million tons, whose more than 8 million will be exported, according to Vibul Panitvong President of sugar producers in Thailand.
Investors have still short position on the asset as evidenced by negative flows on ETC (Exchange traded commodities) during past week. This trend follows the surplus estimates, which could reach 6 million tons for 2012-13 harvest.
Graphically, the sugar is trading in a neutral range on the short-term, even if during past week has recorded a strong acceleration. This movement has allowed to cross 20 and 50-days moving averages, setting up a bullish signal on the short-term, which might lead the sugar in the area of USD 630, level where the bearish trend has began.
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