Thursday, May 5, 2011

Sugar Faces Potential Extra Supply

Mexico is not exactly the first place that comes to mind among sugar traders. America (sugar beets and corn), Brazil (sugar cane), and India (sugar cane) are all more known sources. But when prices surge high enough, as they have been over the past 2 years, farmers around the world start paying attention.

Of greater import is the significance behind the dollar's role as the preferred carry instrument of choice. More will be said on this topic in future posts.

Mexican Sugarcane Growers Upbeat On Next Harvest
The leader of Mexico's sugarcane growers says he's optimistic the 2011-2012 harvest will yield more sugar that the current one if the weather holds up.

"If the upcoming season is a normal one with tropical storms and a few freezes, but less aggressive than this year, without a doubt we're going to surpass the current harvest," Carlos Blackaller, president of the National Union of Sugarcane Producers, said in an interview.

High sugar prices have been luring Mexican farmers of other products into the sugar business, he said. Also, productivity has been increasing as well-financed producers use profits from high prices to hire more labor and to invest in improved agricultural practices.

This should contribute to better production next season in Mexico, the world's sixth-largest sugar producer, Blackaller said.

Mexico's sugar harvest usually begins in November and runs to July of the following year. This season, Mexico is on track to produce about 5.2 million tons of sugar, up from 4.8 million tons during the 2009-2010 season, according to sugar officials.

The average yield of sugarcane per hectare has been about 67 tons this season, and it could reach 70 tons next season, Blackaller said. He added that about 37% of plantations are using irrigation systems rather than relying on rainfall, and that percentage is expected to keep growing. Four years ago, about 30% of sugar plantations were irrigated. "There's a better use of water," Blackaller said.

Rene Martinez, director of the national sugar chamber, which represents the country's sugar mills, was less optimistic about the 2011-2012 harvest, saying it didn't rain when it should have in January and February during planting for the next harvest.

"It's an indicator that the 2010-2011 season will be a hard one, with production probably lower than this season's," Martinez said. "Normally when you plant, you cross your fingers and hope for rain, and since it didn't rain we're expecting bad yields."

Blackaller said industrial productivity has increased roughly 6%, and that many of Mexico's 54 sugar mills have been renovated and improved as their owners seek to take advantage of the bullish market.

Migration has been a problem in the sugar industry in the past, with growers abandoning their plantations to find work in the U.S. or in Mexican cities. But this year, Blackaller said high prices have kept producers "rooted to their plantations."

Mexico is expecting to export a record 1.3 million tons of sugar this year amid rising U.S. demand and the displacement of domestic sugar consumption with high fructose corn syrup.

Source: CME News for Tomorrow

The bottom line: Extra sugar supplies are adding bearish pressure to world markets from unexpected corners. The dollar's role as a funding currency in carry on risk trades also plays a critical role in commodity trades.
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