Sugar oversupply keeps price low

by: Casper Burgering

The sugar price recently skyrocketed. In less than a month, the price increased by almost 30%: from a low on 26 September to a new nine-month high on 25 October. Despite this sharp increase, the price is still around 13% below its starting point on 1 January. Is a short-term recovery to this level realistic?

Agri-Commodities-Insights-Sugar_20180711.pdf (151 KB)

 With the recent sharp price increase, the volatility of the sugar price has risen over the last month to an average of 20%. This is well above the year-to-date average for 2018 and also exceeds the longer-term average (since 2000). A combination of factors has raised price and volatility to a higher level. These not only include the sharp recovery of the Brazilian real – which strongly correlates with the sugar price – but also developments on the supply side contributed. Especially supply developments in Brazil, India and Europe shaped price trend. Sugar production in Brazil, which is one of the largest producers, fell sharply and the output of sugar dropped by 9 million tonnes in the 2018/2019 season. Dry weather during the sugar cane growing season caused a 10% decline in agricultural yields in the second quarter. In addition, a larger part of the harvest was used for the production of ethanol instead of sugar. That was because the production of ethanol became more lucrative. The weak Brazilian real made importing gasoline a lot more expensive, which stimulated the demand for ethanol. In addition, the sugar price remained relatively low, which kept margins for sugar much lower compared to ethanol. Due to the switch from sugar production to ethanol production in Brazil, India suddenly became the largest sugar producer in the world. But this was not only due to the downturn in sugar output in Brazil. India has introduced a pro-farmer policy to protect farmers against low prices when the harvest is exceptionally abundant, the so-called ‘bumper crop’ periods. In addition, the Indian government subsidises its sugar exports, which has led to considerable pressure on international prices. In mid-October, however, India was confronted with a white grub infestation, which will cause significant damage to the harvest. With this, the expectations of the Indian Sugar Millers Association for the coming harvest have been adjusted downwards. Harvest is expected to be 9% lower compared to the previous season. Meanwhile, Europe was also facing problems with the harvest, where planting started relatively late due to persistent cold. Then the spring was too wet and the summer was too dry. These are bad conditions for crops and led to a sharp decline in agricultural yields.

All-in-all, the reason behind the recent price rally was the negative developments on the supply side in Brazil, India and Europe. As a result of the disappointing output of sugar in these areas combined, the projections for expected oversupply have been adjusted downwards. Before these changes in supply, investors assumed a price drop and the number of short positions reached a record. Investors bought back approximately 10 million tons that they had previously sold ‘short’. That strengthened the price rally also. Perspectives are slightly better on the demand side. For some years now, the global refined sugar market has experienced a growth in demand. Still, that growth rate is on a downtrend.

Growth in demand for sugar

Source: OECD

Consumers in developed countries are increasingly aware that excessive sugar consumption leads to health problems. That is why consumption per capita in developed markets is decreasing annually. This trend is particularly visible in Europe, Australia, New Zealand and Japan. In these areas, competition with sugar substitutes is higher. When considering future growth in demand for sugar, particular attention must be paid to the emerging economies, particularly in Asia (such as Indonesia, China, India and South Korea). This is also in line with the increase in the level of prosperity among consumers in these countries, the rise of the middle class and the rise in the consumption of manufactured food products in this part of the world.

On balance, we think it is unrealistic to forecast a recovery in the sugar price in the short term to its starting level on 1 January 2018. The fundamental basis for this is not yet optimal. There continues to be an oversupply despite the problems on the production side. We think the sugar price will drop just below USDc 13/lb at the end of 2018. In 2019 we expect a more stable price trend, partly due to the continued growth in demand from emerging countries.