SUGAR HIGH?

What to make of record sugar prices in light of revelations that imports to one of the world's leading consumers are set to rise? While the rally has been rambunctious, with price rises in nine out of 10 days, predictions that Indian rain shortfall will produce a crop shortage are also increasing estimates as to how much the world's leading consumer of sugar will need to import next year.

Still, fears that the blazing rally might be overdone caused London sugar prices to falter and close with losses after earlier session gains. October sugar on ICE in New York also pared gains but still managed a positive close at 19.36 per pound.

Last year, a poor rainy season halved the sugar crop and turned India into an importer of the sweet-stuff for the first time in three years. The Indian Sugar Mills Association expects production to be lower by 44% for the production year closing at the end of September. Insufficient rains cause problematic yields. Indian production is now expected to fall to 14.7 million tons. Internal shortages within several regions are pushing domestic prices towards international levels.

The high cost of imported sugar is proving a source of concern for domestic producers who can no longer turn a profit at such a high cost of basic inputs. That means that they are deferring production until high world sugar prices abate. But will they?

India's biggest producer states that local prices have to rise in tandem with global prices, or else it will be producing at losses domestically. The difficulty is that last year's drought is now a 2009 problem with production at the 190 producers who account for one-third of national production expected to decline by close to 10%.

Imports may be anywhere from 4-7 million tons for a nation that is typically an exporter of sugar. That single fact is what's giving the market the creeps for now. Any pull back in the price of sugar under the scrutiny of markets looking for more supply rather than less is likely to be a genuine buying opportunity until the global economy shows signs of the so-called 'anemic growth' investors should practically expect to see. India typically produces around 15 million tons of sugar each year.

Meanwhile tightness in Mexican export markets means a smaller quota is available to the U.S. And while the international demand problem creates a problem for sugar buyers the U.S market retains its appeal due to the potential for rising American prices for sugar.

We continue to expect both an outright buying binge for sugar prices. There is an awful lot of money coming off the sidelines we admit, and much of it appears destined for the equity markets but you must not under any circumstances assume that front-month disappointment infers a prediction for longer term price weanesss.

Which Texas-based sugar manufacturer
is set to rally 32% before year end
if the commodities markets continue to reach for the sky?
Find out in the August issue of Global Resources Alert!!

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