Olam sees sugar deficit rising, price rally justified

By David Brough

LONDON (Reuters) - Sugar prices have the potential to rise further after climbing to their highest in more than 2-1/2 years on Monday as production fails to keep pace with rising demand, the chief raw sugar trader for Olam International said in an interview.

Piero Carello told Reuters that Olam predicted a global sugar deficit rising to 7 million tonnes in 2016/17 (October/September) from a deficit of 4 million tonnes in 2015/16.

ICE raw sugar futures rallied on Monday to a 2-1/2 year high of 19.42 cents a lb, powered by sentiment that the world sugar market was shifting into a deficit after several years of surpluses.

"We think there is a fundamental justification for the rally," Carello said. "Raw sugar futures can trade in the low 20s cents per lb."

"The market needs to go up to a place where it signals, we (the world) need sugar," he added.

Carello said global sugar consumption remained robust, climbing at around two percent, or more than three million tonnes, each year.

Consumption growth has been driven by Asia where population growth and changing diets have boosted demand rather than the developed world where several large nations are considering levies on the sweetener to tackle obesity.

A drought in number two producer India has also helped to move the global market into deficit.

Olam forecast sugar output in India to drop to 23 million tonnes in 2016/17, from 25.2 million in 2015/16, due to drought in major growing regions including Maharashtra.

"If the (coming) monsoon is below average, production in India could fall as low as 20 million tonnes, and that could mean that India might need imports (next season)," Carello said.

Rains interrupting cane harvesting in centre-south Brazil, and congestion and delays in loading at the ports, in part due to dredging operations, had also spurred the rally in raw sugar futures, which have gained by 56 percent since late February.

"The headlines (on Brazil) have grabbed people's attention, adding fuel to the fire," Carello said.

He said he expected a modest rise in output in Thailand, the world's number 2 exporter, to 10 million tonnes of sugar in 2016/17 from 9.6 million in 2015/16.

EU sugar output was seen rising to 18.4 million tonnes in 2017/18 after dismantling of production quotas in 2017, compared to 15.5 million in 2016/17 and 13.8 million in 2015/16, signalling potential for the bloc to be a top 10 net exporter of some 2-2.5 million tonnes a year.

(Reporting by David Brough; Editing by David Evans)