See correction in raw sugar price in Q1 '12: Macquarie Bank

Raw sugar prices have fallen off quite sharply. In an interview to CNBC-TV18, Kona Haque, commodity strategist of Macquarie Bank said, there could be some further correction moving into the first quarter of 2012.

Below is the edited transcript of her interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Raw sugar prices have fallen off quite sharply, do you expect some stability at these kind of price levels?

A: Sugar prices are actually bouncing quite nicely in the last two days. This is partly because of the speculative community who are basically scared about what is happening with the European debt crisis. There was a bit of flight to safety which involved big losses across the whole commodity spectrum. So, some of the speculators are coming back into the market in the hope that the European recession or debt crisis might get resolved.

In terms of actual sugar market fundamentals, I think today we are seeing some physical buying coming back at these levels, which are fairly attractive. But I do think that prices are not exactly out of the woods just yet. I think there could be some further correction moving into the first quarter of 2012.

Q: Companies had been benefiting from high ethanol prices as well. But given the way crude prices have been trending, what kind of range do you expect to see on the ethanol now?

A: Yes, they do link quite closely together. If the price of crude oil and ethanol prices were to collapse then yes you would expect to see decline in sugar prices. At the moment, what is supporting sugar prices is the problems in the cane supply in Brazil. This is also supporting ethanol prices in Brazil which domestically are in a huge shortage. So, ethanol prices today are, in sugar equivalent terms, roughly 22-23 cents per pound. This is your support level. If it gets below that then the mills will basically be producing more ethanol rather than sugar. So that is in a sense the price that which point you really would see strong support coming at those levels.

Q: What is your sense though of what the production shortfall will be this season?

A: We think that the central south of Brazil will have a cane crop of 490 million tonne. Infact the consensus seem to be graviting towards that level. There are some looking at 475 million tonne and some who are looking at 520 million tonne.

I think 490 million tonne seem to be quite reasonable. We have had people in the ground who have been doing crop toes and looking at yields. So that seems to be reasonable. I think everything that could have gone bad, went bad this year in terms of frost, we had a very old cane crop, very aging; the drought was there effected growth rates. So, 490 million tonne, which is equivalent to roughly 29.5 million tonne of sugar in the centre south of Brazil.

Q: What kind of range do you see for international sugar prices over the next few weeks?

A: For raw sugar, I think the highs of 30 cents per pound will not be necessarily be visiting that any more because the market globally is moving into decent surplus of about 5 million tonnes. This is compared to three consecutive years of deficit in the last three. So, on that basis, I would say an average of 26 cents per pound for the 2012 calendar year is reasonable.

In terms of ranges, I would expect to see strong support at the 22 cents per pound mark. By the end of the year, on renewed concerns about the Brazilian crop maybe try and retest the 28 cents per pound mark. But I will be averaging 26 cents per pound over the 12-month period.