“Touch and Go” for the World Market Image

“Touch and Go” for the World Market

The heart-breaking war in Ukraine, the Covid lockdowns, the energy crisis (not only a crisis for oil as in the 1970’s, but this time also for natural gas, coal and electricity) – which is causing rampant inflation and a surge in agricultural commodity and fertilizer prices – and a myriad of other factors bedevilling the world, … and yet, and yet world market sugar prices have remained in a relatively narrow range between 18.00 and 20.50 cents/pound (between 380 €/t and 430 €/t FOB world market ports at 96 degrees polarization) since the summer of 2021.

Why? What’s going on? How might the market resolve itself this year? And where might we expect sugar prices to go this summer? Key to this debate is the question of the global sugar balance sheet, with leading trade houses yet to form a consensus on whether we will have a surplus or a deficit in terms of global supply and demand in the October/September 2022/23 marketing year.

Three countries predominate in the discussions and speculation about the world sugar market: Brazil, India and Thailand. There are 109 countries worldwide which produce sugar, and of course all of them consume it, but the world sugar market seems only to concentrate on these three exporting countries which between them account for around two thirds of total exports to the world market. A brief glance at the graph below of major sugar importers and exporters tells the familiar story for sugar: there is a “long tail” of sugar importers – concentrated in the Far East and North Africa – but there are few sugar exporting countries – and Brazil hugely predominates. Recall that the benchmark ICE #11 futures contract is for raw sugar in bulk FOB and stowed on board a ship for export; sugar which is produced and made available for sale in local markets rarely affects the world market, although conversely, the world market may well affect local market prices.

Another peculiarity – or “specificity” – regarding sugar is that rising energy costs may not greatly increase the cost of producing raw cane sugar, thanks to power generated from bagasse, however the costs of refining and transport are heavily dependent on energy costs, particularly natural gas, and hence the premium for refined sugar over raw sugar – the so-called “white premium” – is today riding high at US$ 115 per tonne.

Brazil: The ICE #11 contract for July 2022 delivery has rallied in recent days as meteorological analysts warn there is a heightened risk of a “cold snap” in Brazil. Moreover, with higher local energy prices, Brazilian sugar cane millers are looking to maximise their production of bioethanol for local motor fuel use rather than produce sugar for export. There is speculation that the delayed 2022/23 Centre/South Brazilian sugar cane crop “mix” could be 65% in favour of ethanol, maybe even more, compared with 55% ethanol in 2021/22 (1). Meanwhile, local politics are complicating the picture, with Petrobras, the state-owned petroleum company, setting its prices for gasoline well below world market prices, a gap which is rising as the Brazilian currency strengthens once more below R$5 for one USD. Together with estimates of the local prices of ethanol (2) (and bearing in mind that hydrous ethanol trades at a 67% discount to gasoline prices owing to its lower energy value), sugar traders will have noted that the “ethanol parity price” for sugar is now heading upwards from around 21 ¢/lb today, thus modestly incentivising millers to produce ethanol at the expense of sugar – which may today be sold at the July ‘22 #11 price of just under 20 ¢/lb.

Hence speculation abounds that Brazilian sugar exports in 2022/23 may, as a consequence, be some five million tonnes less than the in the 2021/22 October/September year. As ever, and despite the alarming and heart-breaking “macro” factors this year, the eventual outcome of the Brazilian ethanol/sugar mix will be key to the outcome for global sugar prices in the coming months.

Global demand: As the Covid restrictions appear to be receding world-wide – China is reported to be gradually reopening Shanghai but strengthening work from home guidance – global demand for sugar from food and beverages industries is thought to be growing once again. In China, local prices are reported to be around US$ 900 per tonne (3). Chinese sugar imports are forecast to be around 4.4 million tonnes, down slightly from 2021/22, and China may source from its very high stocks to cover any shortfall. In Indonesia, the largest sugar importer, sugar consumption has been rising strongly for many years, and today sugar prices are reported to be well above US$ 1,000 a tonne (4). Ahead of Ramadan this year, the Government of Indonesia (GOI) banned the export of palm oil and authorized the importation of a further 900,000 tonnes of raw sugar for refining, up 30% from 2021, but given that Indonesian sugar stocks are in decline, the GOI may have to authorize more imports to reach a forecast total of 5.6 million tonnes in 2022/23. Given relatively robust global demand, including in India where consumption is expected to reach a record 27.8 million tonnes, what could replace the 5 million tonnes void in the global market caused by these lost Brazilian sugar exports? We must first consider India and then Thailand.

India: In India, a heat wave is giving rise to concerns that forecasts of another huge Indian crop may be premature. According to the latest release by the Indian Sugar Mills Association (5), sugar mills across the country produced 34 million tonnes of sugar between 1st October 2021 and 30th April 2022, about 4.2 million tonnes more than the 30 million tons produced at the same time last year, leading analysts to speculate that India will produce 35½ to 36 million tonnes in total in 2021/22, up from 31 million tonnes in 2020/21. However, Indian production could decline by around one million tonnes in 2022/23, largely owing to an increase in the quantity of Indian production diverted to producing ethanol. On 18th May 2022, the Indian government approved an ethanol blending target of 20% (“E20”) by 2025 and the expectation is that 3.2 million tonnes of sugar production will be “lost” to ethanol in 2021/22 and 4 million tonnes will be lost in 2022/23. Without any subsidies (unnecessary whilst world market prices are above around 19 ¢/lb), Indian sugar exports are accordingly forecast to reach a record 9.5 million tonnes in 2021/22, declining to 6 million tonnes in 2022/23, or perhaps even to just 5m tonnes. Hence India does not appear to have the whole answer to solve the possible global sugar deficit in 2022/23 and so we must look further afield … to Thailand.

Thailand: Thailand could be the “swing producer” in solving the global market supply and demand conundrum – assuming the area planted to cane in 2022/23 remains as expected and that yields improve thanks to better – wetter – weather and that good cane prices prevail compared with cassava, the main competing crop. The 2021/22 crop has recently completed, producing around 10 million tonnes of sugar, of which 7.5 million tonnes are expected to be exported. In 2022/23, all going well, Thailand is expected to produce around 12.5 million tonnes and export around 9 million tonnes in 2022/23, but high fertilizer costs may yet discourage farmers to maximise yields and the weather will remain a risk during the high growth phase between July and October 2022.

Global supply and demand balance: All in all, the loss of 5 million tonnes of Brazilian sugar production could partially be made up by India (+2m tonnes in 2021/22) and Thailand (+1.5m tonnes in 2022/23) – weather permitting, all going well – and it remains possible that other, smaller exporters may bridge the gaps, such as Pakistan where exports are expected to rise from 2.5 to nearly 4.0m tonnes in 2022/23 – again assuming good yields.

In summary, it’s “touch and go” for the world market and no wonder there is as yet no consensus on whether we will see a global surplus or a deficit in 2022/23. For the summer of 2022, world market sugar prices seem likely to remain rangebound between, say, 19 ¢/lb on the downside based on Indian export parities, and 21 ¢/lb on the upside based on the Brazilian sugar/ethanol mix. The risk remains on the upside, however, especially if the weather and/or if further heart-breaking geopolitical events upset the delicate balance of the world sugar markets.
© Julian Price


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