November 2, 2010 7:22 pm

Sugar soars to 30-year high as supply fears grow

The price of sugar has jumped to a 30-year high as the Brazilian harvest has tailed off sharply, hardening expectations of a shortage.

Traders believe that prices could soar over the coming months as the market faces a supply shortfall driven by smaller-than-forecast crops in important growing countries from Brazil to Russia and western Europe.

At the same time, inventories are at their lowest levels in decades. “All buyers we see are buying on a hand-to-mouth basis,” said Peter de Klerk of Czarnikow, the London sugar merchant.

That has pushed prices up sharply, with raw sugar futures in New York soaring 135 per cent from a low of 13 cents in May.

On Tuesday ICE March sugar rose 4 per cent to a peak of 30.64 cents a pound, surpassing the level reached in February and rising to their highest point since 1980, when prices jumped to nearly 45 cents.

The dramatic rise in sugar prices is causing headaches for policymakers. While sugar is widely available in the west and its price is rarely considered, it is an essential source of cheap calories in emerging economies, where surging sugar prices are driving food inflation.

On Tuesday India’s central bank raised benchmark interest rates for the sixth time this year in an attempt to curb inflation.

New Delhi has emerged as a crucial factor in the sugar market, as India’s harvest is expected to be large, but the government is still debating how much sugar to allow the country’s industry to export. Traders expect India to authorise exports of 1m-2m tonnes starting in December. Anything less, or even a delay to the decision, could send prices spiralling higher, traders warn.

“They need to start selling additional volumes by mid-December, otherwise the hole in the market is getting wider,” said Mr de Klerk.

The latest move up in prices was triggered by a spell of dry weather in Brazil, which dominates the global sugar trade with about half of world exports.

Unica, the country’s cane industry association, said last week that production was down 30 per cent in the first half of October from 2009, while Kingsman, a consultancy in Lausanne, has downgraded its forecast for the Brazilian crop by 2.3 per cent. “If Brazil is going to have a lower harvest it makes it that much harder to fill the deficit,” said Jonathan Kingsman.

Many observers believe Brazil’s sugar harvest will be smaller next year, as farmers are forced to replant ageing cane.

“For the sugar market, fear about Brazil is worse than fear about India, which drove the price to 30 cents last year,” Jean-Luc Bohbot, head of trading at Sucres et Denrées, one of the largest physical sugar traders, said last week.

“Anything affecting Brazil will have a direct impact on trade flows.”

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