Sugar prices have halved in value since mid-2011 as bumper harvests outpaced demand growth. Now sugar prices are currently trading near six-month lows, just below 16 cents per lb on the expectation that Brazilian farmers will again have a bumper crop with farmers reportedly harvesting their crop at a blistering pace. Brazil is the largest sugar producer, accounting for just over 20% of global production and almost 60% of global sugar trade flows.
According to Unica, mills in Brazil’s center-south region, which process 90% of the country’s cane have harvested 13% more sugar between April and mid-July than the same period in 2013. However, according to the investment bank Macquarie one reason for the rapid harvest is the dry weather following the drought that affected much of Brazil earlier in the year has enabled farmers to transport their cane from the fields much faster.
While the effects of the drought have inflated early crop indications by making it easier to harvest, there is also a suspicion that the drought also badly damaged the Brazilian crop with many forecasters predicting a lower harvest this year. Sugar output from other producers may also disappoint. India, the second largest producer (17%) has seen less rain than usual since the monsoon season began in June, although this may still be enough to cover domestic consumption.
However there are a number of factors, both and short and long term which might limit any potential upswing in prices, should the lingering effects of the drought reveal themselves in a poor crop.
First, Brazilian sugar farmers are suffering as current low prices are well below their cost of production. Although Brazil used to have the lowest sugar production costs in the world, levels have risen steadily over the past few years and now range between about 20 cents and 24 cents per pound, depending on the age and size of the mills. In addition farmers suffer from over-capacity, lack of storage and logistics and (unlike other producers supported by subsidies) unsupportive government policy. The mounting debt that has resulted has forced many mills to close but is also proving a bottleneck to restructuring, with many local banks owning the debt. All of which means that it may take some time for there to be a supply response to low prices.
Second, the Brazilian government has capped fuel prices in a bid to control inflation (up to 6.5% in August from below 4% back in 2007), but which also squeezed ethanol margins. To recap, sucrose extracted from sugar cane can be manufactured into either raw sugar or ethanol. In Brazil, typically 48% goes into making ethanol and 52% goes into producing raw sugar, which is then processed into refined sugar. According to sugar and ethanol cooperative Copersucar, ethanol demand in Brazil could increase by 8 billion litres to over 30 billion litres a year if the government were to allow state-owned oil major Petrobras to sell gasoline at market prices.
Third, high stock levels. According to Commerzbank high stocks thanks to previous years’ surpluses “should continue to prevent major price jumps.” The bank suspects that even if world production for 2014-15 falls 2-3 million tonnes short of consumption, as forecast by many observers, that this ” would not lead to a genuine scarcity” of supplies, after four successive seasons of production surplus.”
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