Manufacturers face greater sugar price pressure

Posted by James Ferre on 19th August 2009

Global sugar prices have skyrocketed to 28-year highs in recent weeks on supply shortage concerns and speculative momentum, leading to pressure on costs for manufacturers.

A supply deficit in India due largely to low monsoonal rainfall has resulted in a rapid run down in world inventory levels, sparking the strongest price action seen in the market in almost three decades. Meanwhile, wet weather in Brazil has raised concerns that the industry may mill less cane and produce less sugar than previously expected.

Prices have eclipsed the highs reached in 2006, but remain well below the previous two ‘sugar price events’ seen in 1980 and 1974.

Bad weather threatening crops
The rally has been fuelled by expectations of lower production in Brazil and India, which together account for almost 40 per cent of the global sugar production, Rabobank notes. The development of an El Niño weather phenomenon has brought a poor monsoon to India, threatening the crop that will be harvested from October, and rains to Brazil just as the country needs dry weather for its ongoing harvest. The supply shortfall is exacerbated by resilient demand in spite of the impact of the economic crisis.

According to the Indian Meteorological Department, this season’s monsoon is currently 29% below average, with some of the major sugarcane producing regions being significantly affected. Rabobank is currently forecasting Indian sugar production of 14.5 to 15 million tonnes, down from earlier forecasts of in excess of 20 million tonnes only a few months ago and 45% below the 26.5 million tonnes produced in 2007/08.

From a fundamental point of view, most of the bullish production news appears to be factored into prices. The outlook for conditions in Brazil over the coming months appears drier than June/July which is likely to benefit sugar crush rates. Likewise, there is some expectation that the highest prices in almost 30 years will result in some demand rationalisation, particularly in developing countries.

Rabobank suggests that the response of governments to the price rises will largely dictate the price in coming months. If they take a proactive approach to purchasing and subsidising consumption levels, it will support further bullish price movements.

Despite speculator appetite for sugar likely to result in further price gains in the short term, from a fundamental point of view prices appear to have done enough, particularly at the front end of the futures curve (unless there is more bad weather in Centre/South Brazil). Fortunately, with historical sugar spikes appearing to last around 12 months, there is likely to be some flattening in the curve with 2010 production likely to respond to current price levels, Rabobank concluded.