November 2010 - Now in deficit! A third look at the 10/11 balance

Market has not resolved physical imbalance and further supply stress to be expected

The 2010/11 balance has swung into deficit. With Northern Hemisphere beet crops approaching the end of the harvest and with Southern Hemisphere cane harvests also coming to an end, it has become apparent that many producers will fail to reach production targets. The main driver behind the changing outlook for the production side of the balance is weather. Hot dry weather during the summer damaged the development of the Russian beet crop while agricultural yields have also been affected
in the Brazilian and South African sugar industries by extensive periods of dry weather. Meanwhile, the Indonesian and Australian sugarcane industries have been battling against extreme wet weather, which has made harvesting difficult and reduced sucrose yields. As a result the global production response to the price spike in the first part of 2010 has not only been smaller than first expected but also smaller than the response seen to the 2006 rally.

  1. Our latest revision to the 2010/11 balance implies that there will be a third year of stock draw downs in the global sugar market. This is likely to manifest itself in underlying tensions within the physical sugar market, expressed in cash premiums, as well as a sharply backwardated futures structure. The structure will encourage producers to advance supply, while consumers will look to defer demand. Furthermore, at the extremes, producers might also look to ‘lend’ sugar to the world market in order to replenish the domestic stock balance with cheaper sugar during the middle part of 2011.
  2. Though we see the 10/11 season in deficit, production is still forecast to deliver significant growth. However, we have revised down our growth forecast to 11.1m mtrv, from the previous forecasts of 14.8m in August and 17.4m mtrv in May.
  3. During the 2010/11 season we project cane sugar production to rise to 134.5m mtrv, which is down from our previous estimate of 137.9m mtrv but still substantially higher than last year’s total of 123.0m mtrv. However beet sugar production is now forecast to fall to 34.0m mtrv, down from our previous estimate and last year’s figure of 34.3m mtrv.
  4. The growth in global production continues to be led by the cane producing countries, in particular Brazil and India. In contrast many other producing countries including Argentina, Australia, Indonesia, South Africa, Russia and Europe will see falls in the 10/11 season. In total, we forecast global availability at 168.4m mtrv in 2010/11, down 3.7m mtrv from our previous estimate but up from 157.4m mtrv in 2009/10.
  5. In CS Brazil, the end-October total of just over 500 million tonnes of cane crushed represents around 90% of the region’s cane estimate. As a result of strong prices the CS Brazil industry has maximised sugar production where possible. We are currently expecting total Brazil production to reach 41.0m mtrv.
  6. The Indian crop prospects for 2010/11 continue to look promising. We are maintaining our production estimate of around 27m mtrv for the 10/11 season.
  7. On the demand side, we have seen high prices disrupting supply chains. However, while we continue to look for signs of demand being lost, indications are instead that growth has been constrained. We are therefore estimating global consumption in 2010 at 167.5m mtrv (167.9m mtrv previously) rising to 170.8m mtrv in 2011 (171.3m mtrv previously).
  8. Our analysis indicates that the rise in global production during the various national crop cycles of the 10/11 season will fall short of consumption by 2.8m mtrv.  Given the draw down in stocks that has taken place during the 2007/08 and 2008/09 season the global supply balance and outlook for the market remains extremely fragile.

Toby Cohen, head of analysis at Czarnikow, said: “Though the sugar futures market has fallen from its recent highs the underlying fundamental trends have strengthened, which suggests that the fall in prices is a function of the unprecedented rise in volatility and global macro risks as opposed to being a sugar related event.  Given the heightened tension in global markets sharp falls, as well as rises in commodity values, should be expected – even if these do not correlate on a day-to-day basis with underlying market fundamentals. However, in terms of longer moving trends it is very apparent that the market has not resolved the underlying physical imbalance and further supply stress has to be expected.

“The structure of the futures market, in particular the relative value between raw sugar contracts and the white sugar premium, will be critical towards resolving the physical tensions and taking the market into the second half of the year. At this point in time the return of supply from the CS of Brazil will be able to mitigate short term tensions given the fragile balance sheet as a result of a third deficit year. Until then the market will need either need to incentivise northern hemisphere producing countries to ‘lend’ sugar to the market or look to the demand side of the balance sheet to adjust to the shortfall.”

Notes to Editors

For further information please contact:

Czarnikow 020 7972 6600
Toby Cohen
Peter de Klerk

Cubitt Consulting 0207 367 5100
Caroline Merrell
Michael Faulkner

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.

Czarnikow deals with around 10% of the 50 million tonnes of sugar that is traded annually, which means that it 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.