September 12, 2016 / 7:12 AM / 2 years ago

After cotton and corn, China could sell sugar from state stockpiles

* Traders, analysts say sugar sale could come soon

* Say market prices around suitable level

* Would follow state auctions over summer of corn, cotton

By Dominique Patton

BEIJING, Sept 12 (Reuters) - China could be preparing to auction sugar from its huge state stockpiles for the first time in five years following sales of millions of tonnes of corn and cotton over the summer, analysts and traders said.

With its top leadership prioritising ‘supply-side reform’ this year, the government is under pressure to sell off excess stocks of farm commodities that have piled up in its warehouses after years of buying.

That combined with high Chinese sugar prices could prompt the sale of part of the estimated 7 million tonnes of the sweetener in state reserves, worth about $3.3 billion at current prices and equal to well over a year’s worth of the country’s imports.

Such a step by the world’s top sugar buyer could pressure global prices, potentially dragging on their longest and steepest rally in years, although analysts said that initial sales would probably be for limited volumes.

Han Xu, an analyst at Cofco Futures who had heard speculation about an auction, said it was “possible” China would sell some of its ageing stock and that there would be appetite given a growing supply deficit.

The National Development and Reform Commission, responsible for managing reserves, did not respond to requests for comment.

Chinese sugar output has declined sharply in recent years as farmers switch to more lucrative and less labour-intensive crops such as bananas or other fruit.

Output fell 18 percent in 2014/15 to 8.7 million tonnes, boosting the deficit in local supply to around 7 million tonnes.

China last purchased sugar for its reserves in 2013 at a base price of 6,100 yuan ($915.31) a tonne, prompting the view that prices need to be at that level for it to sell stocks without making a loss.

The front-month sugar price has been hovering near 6,000 yuan since hitting that level in late July, sparking market talk that a sale is increasingly likely.

“Everyone is talking about it,” said a China-based trader, declining to be identified as he was not permitted to speak with media.

But most analysts said the government would only auction around 300,000-500,000 tonnes to avoid putting too much pressure on local prices ahead of the sugarcane harvest in November.

China has previously only conducted three major sales from its reserves, most recently in 2010/11, according to Founder Commodities. Only in 2006 did local prices drop following a release, it said.

The market may not have much appetite for state sugar, added Zhan Xiao, analyst at Shanghai Buyun Investment Management, with sugar sales slow this year thanks to wet weather which hurt beverage demand, a weaker economy and large volumes of smuggled sweetener reaching the market.

The reserves include about 2 million tonnes of white sugar, some dating from 2012, that would need to be reprocessed before consumption, traders said.

$1 = 6.6644 Chinese yuan renminbi Additional reporting by Chris Prentice; Editing by Josephine Mason and Joseph Radford

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