May 2010 - A First Look at the 10/11 Balance Sheet: A Return to Surplus?

MARKET HEADS FOR SURPLUS AFTER TWO YEARS OF DEFICIT

GLOBAL SUGAR PRODUCTION EXPECTED TO REACH RECORD

The 2010/11 season is promising to deliver a sharp rise in global production as producers respond to high sugar prices. This should see the global balance return to surplus during 2010/11 following two years of production deficits. Though the majority of countries are still only part way through the 2009/10 season, the early start to CS Brazil’s 2010/11 season is driving the market today and has enabled some importers to bridge the shortfalls that they have experienced in 2009/10 with imports from Brazil’s new crop. At this stage, we estimate a production surplus of 2.5m mtrv (metric tonne raw value), which will result in some addition to global stocks. However, while this will go some way towards reducing the tensions in the physical market, it is unlikely to be sufficient to resolve depleted global stock levels. As a consequence, we expect that the global market will remain fragile during the 10/11 crop cycle. In this month’s Review, we have broken with tradition and rather than presenting our final analysis of the 09/10 balance sheet have stepped forward to the changes expected during the new 10/11 season and how they will shape the global market.

Key expectations from the season:

Global production should rise by 17.4m mtrv during the 10/11 season as producers around the world expand capacity in order to capture higher returns.
The global sugar economy has seen a draw down of nearly 27 million tonnes of stocks over the last two seasons as consumption has outstripped production.
Though we are looking for a 17.4m mtrv increase in production in 10/11, we are only expecting a modest surplus of around 2.5m mtrv due to underlying levels of consumption growth.
During 2010/11, we project global cane sugar production to recover to 139m mtrv from 123.1m mtrv last year, while global beet sugar production is expected to rise to 35.3m mtrv, up 1.5m mtrv.
This means that global availability at 174.3m mtrv in 2010/11, up from 156.9m mtrv in 2009/10. Both the cane and the global production total represent new records, exceeding the previous highs seen during the 2007/08 cycle.
On the demand side, high futures prices reduced the level of interest from consumers and industrial users during the early part of the year.
Low stocks have seen domestic prices remaining high despite the fall in futures market prices.
Global consumption in 2010 is expected to be 168m mtrv, which represents year-on-year consumption growth of just 1.7%.

Country breakdown

Brazil: The increase in global production this season will be led by a big increase in sugar production during the current CS Brazil crop. We have increased our projection for the forthcoming cane harvest to 590 million tonnes, with the strong start and La Nina conditions, facilitating a strong crush during the fourth quarter.
India: Since our last assessment in February, the Indian 2009/10 crop has seen a rebound in prospects. Indian sugar production in 2009/10 is revised up and now expected to exceed 20.7m mtrv, compared with 16.3m mtrv in February.
China: The 10/11 season is consequently expected to see production recover to 13.2m mtrv. However, this will still be insufficient to cover domestic consumption, which will see the need for China remain an importer during the 10/11 season.
Thailand: Production in 10/11 is expected to be higher than what was achieved this year. At this stage we are therefore forecasting a sugar production total of 8.4m mtrv.
US and Mexico: US production in 2010/11 is projected to increase to 7.3m mtrv.
Russia: The high price environment in the domestic market has led to increased planting for the forthcoming season. This has resulted in an increased production estimate of around 1.9m mtrv for 2010/11 compared with 1.4m mtrv this season.

Conclusion

Following a 27m mtrv draw down in global stocks over the previous two season, global producers have responded to higher prices and production is forecast to rise by 17m mtrv to a record. Although it is still early in the season, the initial signs are that the balance sheet will return to surplus, which will go some way towards easing the tensions in the physical market. Forward futures prices are at a level that still cover operational and average capital costs, producers exposed to spot futures prices are once again facing returns that are not attractive. While this is a logical price response to a market in surplus, as our analysis is indicating, it is also indicative of a market that is comfortably discounting risk. As a consequence, although we are expecting to see the global balance sheet relax as a result of higher production the basic structure of the market remains heavily geared towards one dominant supplier.

Toby Cohen, head of analysis at Czarnikow, said: “Global sugar production is on track to hit a record this year after two years of deficits. However, despite the predicted small surplus, little has changed in terms of fundamentals and we expect the market to remain fragile.”

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About Czarnikow:

Czarnikow Group is one of the most respected names in agricultural commodity markets and has been providing high quality market services since 1861. Czarnikow operates in three core areas; sugar, biofuels and corporate services. Their success is built upon knowledge of the market, confidentiality, reliability and independence.

Commercial involvement in physical sugar transactions in excess of 8 million tons of sugar each year means that Czarnikow has a first hand presence in all major sugar markets of the world. Czarnikow works throughout the entire supply chain providing services to growers, millers, refiners, beet producers, traders, merchants and industrial users.

Czarnikow operates from a head office in London and a network of 10 regional offices to service clients and customers globally.