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.
Copersucar lowered its forecasts for the Brazilian cane harvest to 580 million tonnes from 595 million tonnes due to frost and higher rainfall. However, sugar production figures were raised to 33.5 million tonnes from earlier estimates of 32 million tonnes due to a greater switch from ethanol production to sugar as a result of the depressed Brazilian currency. Copersucar added that returns from sugar production and exports were 10% to 15% higher compared with anhydrous ethanol production.
Unica’s forecast for sugar production is 35.5 million tonnes while Canaplan’s latest forecast is 34.5 million tonnes. So Copersucar may have undershot in its earlier estimates. Final figures for sugar production in Brazil look likely to be around 34 million tonnes which is a tad lower than last year’s 34.1 million tonnes.
A consensus of forecasts from leading market sources for sugar prices at the end of 2011 indicate a mean forecast for raw sugar of 25.19 cents per pound with the highest being 31 cents and the low forecast being 21.50 cents. The forecasts for white sugar at the end of 2011 indicate a mean of $670 per tonne with a high forecast of $800 and a low of $562. The forecast for the global sugar surplus for the 2011/12 season is a mean of 6.35 million tonnes with a high forecast of 9 million tonnes and a low of 3.5 million tonnes.
The forecasts indicate that sugar prices may be trending lower over the next few months. The forecasts were obtained in mid July 2011. A weaker U.S. dollar and UNICA announcing in July that Brazil’s center south sugar cane crop is likely to be down by over 6% or 35.5m tonnes due to bad weather and older ratoons resulted in sugar prices soaring with white sugar reaching a record $890 per tonne and raw sugar hitting a 4 month high of 31.33 cents per pound.
Sugar production is expected to decrease by slightly more than 2 million tonnes with slightly less sugar than expected being diverted to ethanol production due to higher margins from current sugar prices.
Brazil may announce that it is lowering the percentage of ethanol required to be mixed in gasoline. The primary source of ethanol in Brazil is from sugar cane and if the requirement for 25% ethanol is eased to 18% this would free up sugar supplies that would have otherwise been diverted to ethanol production.
Sugar futures declined on the news. The news follows a reported drop in cane production in Brazil’s center south due to older ratoons and lower yields.
UNICA is expected to announce that sugar production in the Center South region of Brazil is expected to be lower than production during the 2010/11 season which amounted to 33.5 million tonnes. Production is therefore short of the 35 million tonnes estimated by the market for the 2011/12 season.
The news sent sugar prices soaring to achieve the highest daily gains of 2011 as Brazil approaches peak harvest season. Older cane ratoons, dry weather in the second half of 2010 and higher sugar prices encouraging delays in replanting and use of older ratoons resulted in lower sugar yields. The Center South produces most of Brazil’s sugar.
Germany produced 3.64 million tonnes of white sugar during the 2010/11 season according to the German sugar industry association WVZ, down from the 4.2 million tonnes produced during the 2009/10 season. Bad weather reducing sucrose content was to blame. Initially a heat wave in the summer, followed by late rains and then a very cold winter impacted the crop. The 2010/11 season is now complete.
German sugar supplies stand at 3.86 million tonnes which is almost 1 million tonnes above Germany’s EU quota of 2.89. The EU sets quotas for sugar production which is subsidized across the EU. Above quota sales are restricted to industrial use such as ethanol production.
Imports into the EU are lower due to higher world sugar prices making other destinations more attractive. German demand for sugar is likely to increase following the government’s decision to increase the percentage of ethanol blended into gasoline in Germany. This is likely to also increase the size of the German beet crop during the 2011 season which commences in the winter.