In response to a recent question concerning some of the major factors influencing sugar prices a brief summary below outlines such factors.
Brazil is the world’s largest sugar producer and exporter with over 20% of production, over 40% of exports and an even greater share of raw sugar exports. This implies that Brazil will have a substantial influence on the world sugar market and sugar prices. Most of Brazil’s sugar is produced in the Center South region with Sao Paulo and Parana being the main producing states. Production costs in Brazil’s Center South are the lowest globally. Therefore the cost of producing sugar in Brazil and the Centre South region more specifically has direct implications for world sugar prices. World sugar prices denominated in US dollars and Center South sugar prices exhibit long-run co-integration. Naturally the Brazilian Real through its exchange rate with the US dollar also plays an important role in world sugar prices.
The most obvious influence on sugar prices is the impact of annual world supply and demand balances. These can be analysed through production minus consumption figures and the ratio of world sugar stocks to global consumption. Stocks can magnify or reduce the impact of a sugar surplus or deficit obtained from analysing production and consumption figures.
Another major factor affecting world sugar prices is the error that is made when estimating consumption and production figures. Once estimates are revised or final figures published the correction can have an impact on sugar prices. Figures showing a world sugar surplus that eventually after revision show a deficit may lead to a rise in prices to adjust for the error.
There are other short, medium and long-term influences on sugar prices. However, the above are probably a few of the most significant.
Minister K.V. Thomas confirmed that sugar prices have remained stable since April 2013 after deregulation of the sector. Deregulation has given mills the freedom to sell in the open market and no obligation to supply the sweetener at subsidized rates to government ration shops.
Sugar production during 2012-13 sugar season is estimated to be about 24.8 million tonnes as against domestic consumption requirement of about 23 million tonnes. The import duty on import of sugar has been kept at moderate level of 15 per cent, he added. Sugar is currently available in the market at Rs 35-40 per kg in the capital.
India is the world’s second largest producer and biggest consumer of sugar. India’s rupee has tumbled 14% this year. Exports may increase threefold next year as the depressed domestic currency increases demand for sugar exports from the Middle East and Asia. Exports could reach 1 million metric tonnes according to Renuka Sugars with the National Federation of Cooperative Sugar Factories suggesting that exports this season may exceed 300,000 metric tonnes.
Indian exports may simply add to global sugar stocks further depressing global prices. Sugar prices have fallen for three years making the decline the longest since 1992. Global supply in the 2013/14 season commencing October will exceed demand by 4.5 million tonnes.
Brazil’s forecast for the 2012/13 cane crush is unchanged at 512 million tonnes of cane and 31 million tonnes of sugar according to Datagro. These figures are for center south production of between 545 and 575 million tonnes of sugar cane. The price and demand for gasoline will determine sugar output in the coming season with U.S. demand for ethanol a possible reason for increased ethanol output in Brazil as opposed to sugar. The U.S. is likely to import 2.5 billion litres of Brazilian ethanol up from 1.5 litres.
Dry weather resulted in Brazil’s 2012/13 sugar forecast being reduced by 1.5 million tonnes in September due to dry weather and lower yields. Gasoline prices and U.S. demand for ethanol are variables likely to be monitored for further changes to forecasts. Also being monitored is a possible decision by Brazil to increase the ethanol content in gasoline from 20% to 25%. This would increase ethanol production at the expense of sugar production.
The increased demand for Brazilian ethanol described above would account for approximately 35 million tonnes of sugar cane. Hence an equivalent reduction in sugar production may be anticipated.
More than 500,000 tonnes of ICE October raw sugar has gone to delivery with Bunge thought to have taken most of the 11,000 plus lots. The market will wait to see what Bunge intends to do with such a large delivery of sugar and what the destination will be once vessels are nominated. The move could add further bearish pressure. October raw sugar closed at an 84 cent discount to March raws indicative of the surplus sugar on the market.
Surplus sugar continues to put downward pressure on prices as the Brazilian harvest gathers pace in the world’s largest exporter. While Thailand is expected to export in excess of 7.5m tonnes in its 2012/13 season down slightly from last year.
The nearest month October raw sugar contract closed at 20.42 cents per lb while December white sugar closed at $574.50 per tonne.
Tereos is seeking to expand into the natural sweeteners market in Brazil by investing $130 million in a starch factory with further investments possible. The company seeks to tap into the fast expanding market that is evolving and becoming increasingly sophisticated, in the sense that the ingredients being used aim to improve the quality and property of food products resulting in lower use of calories and higher fibre content. The market is thought to be expanding by between 5% to 10%.
The Brazilian investment compliments the company’s sugar production in Brazil and allows it to further expand outside Europe. In 2010 Tereos announced a joint venture with Malaysian Pure Circle to develop products made with natural sweeteners to compete with existing artificial sweeteners saccharin, aspartame and sucralose.
Cargill recently announced an investment in a corn processing mill in Brazil to produce starch and sweeteners. Brazil’s Petrobras concluded a $1.2 billion deal with Tereos in 2010.
Tereos invested in Brazil’s sugar market a decade ago by establishing a joint venture which was followed by acquisitions and gradually increased market share. Tereos is now Brazil’s third largest such group.
Brazil is the world’s largest exporter of sugar and responsible for more than 50% of sugar trades.