Sugar Prices Drop to Lowest in 16 Months

Sugar fell to its lowest level in 16 months Wednesday as traders were concerned that slumping oil prices and China's crackdown on sugar smuggled from Myanmar could aggravate an already oversupplied market of sugar.

Raw sugar for July lost 4% to end at 13.06 cents a pound on the ICE Futures U.S. exchange, the lowest settlement level for the front-month contract since February 2016.

Crude oil continued its slide on Wednesday following a government report showing that distillate inventories rose 1.1 million barrels, a larger buildup than expected. The WTI crude August contract fell 2.3% to $42.53 per barrel, the lowest level since August.

Lower crude prices will translate into lower gasoline prices in Brazil, the world's largest sugar producer, making it more unlikely for sugar mills there to switch from sugar to ethanol.

Sugar traders are closely watching Brazil, as it is big enough to swing the global market. Sugar production in Brazil is well behind last year's unusually swift start, but the Brazilian Sugarcane Industry Association predicted that sugar production will only decline marginally from the previous year's record.

Despite a 30% drop in sugar prices from a year ago, many Brazilian mills would continue to produce sugar as they already locked in prices when they were higher. But the tumbling sugar prices proved to be painful for small producers who largedly received market prices.

S&P Global Platts estimated that global output would outstrip consumption by 3.138 million tons for the next season. With 582 million tons of cane, a 2% variation means Brazil's sugar production could fall in the range between 33.3 million and 36.3 million tons, Platts estimated.

On the other hand, Chinese authorities continued to crack down on the smuggling of white sugar from Myanmar with seizure of sugar and the freezing of some 1,000 bank accounts by the Chinese government, many belonging to Myanmar citizens, according to Sucden Financial Research, citing Yunnan Sugar Network.

"As the Chinese government is tightening the border controls, a lower quantity of sugar from Myanmar will be smuggled. Then smugglers have to find other solutions to put this sugar into China," said Claudiu Covrig, a senior agriculture analyst at Platts Kingsman, a unit of S&P Platts. But there are few alternative routes for Myanmar smugglers.

"If you can't smuggle so much sugar into China, then you'll have extra white sugar in that area," he said.

Sugar smuggling into China has increased dramatically over the past few years, with Mr. Covrig estimating that about 2.2 million tons of white sugar would be smuggled into China this year. That had reduced China's demand for raw sugar, which is processed into refined sugar.

Last month, the Chinese government also imposed hefty penalties on sugar imports, charging up to a 95% duty for out-of-quota imports, to discourage imports. Beijing was under pressure to help its domestic sugar mills that were facing competition from cheap imports from Brazil and Thailand.

Price Futures Group warned that demand for sugar could soon see a short-term increase as Ramadan is ending, which could provide buying interest to restocks in Muslim countries. Ramadan ends the evening of June 24.

In other markets, cocoa for September dropped 3.4% to settle at $1,853 a ton, arabica coffee for July was down 2.1% to end at $1.2205 a pound, frozen concentrated orange juice for July lost 3.1% to close at $1.3140 a pound, and December cotton fell 1.2% to 68.17 cents a pound.

Write to Carolyn Cui at carolyn.cui@wsj.com

(END) Dow Jones Newswires

June 21, 2017 15:39 ET (19:39 GMT)