January 2011 - Sugar in 2011: initial thoughts about the year ahead

Another  Uncertain and Volatile Year

This year looks set to be another dynamic year in sugar. The last time the raw sugar market began the year trading at over 30c was back in 1981, when it opened at 31.90c, but ended the year at just 12.80c. At that time, the market was still responding to the price spike to 45c in 1980, which ultimately saw prices fall back below 3c in 1985, and though there are those who believe that the latest rally means that sugar is inevitably due for another fall, our view is that the risks in the market today are different to those thirty years ago. In this month’s review, we have taken a look at the year ahead and considered the various seasonal influences on prices.

  1. Although it is only the beginning of the year, the sugar market is already several months into its 2010/11 production cycle. In fact, southern hemisphere cane crops are already complete, as is the northern hemisphere beet harvest. In both cases, the key crops have been a disappointment.
  2. Growth in Indian production has been a key theme of the 10/11 season as India is set to deliver the largest increase in production of any country, outpacing Brazil, as a result of a large increase in area under cane. However, agricultural and sucrose yields are also a critical consideration for the Indian crop and these have not been as good as initially hoped.
  3. The North East of Brazil has not enjoyed a good season and numbers are indicating both a lower crush and sugar production.
  4. The main focus in the second half of the year will be the crushing in the Centre-South of Brazil, which the sector is saying will occur later than last year potentially reducing export availability during Q2’11.
  5. China is a smaller producer and consumer than India but it is likely to have a greater impact than India on global trade this year. With the Chinese market in deficit, a key factor to watch for will be possible frost damage to the Guangxi cane crop through January and February.

 

Conclusion
Early hopes of the 10/11 season returning the global balance to surplus are now forgotten, as adverse weather has damaged production around the world. High raws prices and the backwardated market have seen refineries cut back on melt rates, helping to resolve some of the immediate strain on the market. However, the reduction in refinery activity has implications for the market later in the year, and threatens a repeat of the problems seen in 2010.  Looking further ahead, the global balance could return to a small surplus in 2011/12, but it will not take much to shift the fragile balance sheet with weather risks remaining high. Rising food price inflation is also driving growing political interest in the market. Where sugar is a politically sensitive commodity, this could see governments stepping in to the physical market to replenish stocks while from a futures market perspective the prospect of increased regulation has also been raised. In this context the recent past is not much of a guide and we need to recognise that the risk of shocks remains high.

 

Toby Cohen, head of analysis at Czarnikow, said: “The year ahead looks to be every bit as dynamic as last year. Despite an increase in Indian production, the market continues to look fragile and with early disappointments in North-east Brazil and in the beet crops of the Northern hemisphere, the second half of the year will be key, with the risk of political and weather shocks remaining high.”
                                 

Notes to Editors

For further information please contact:

 

Czarnikow
Toby Cohen                                                                         020 7972 6600

 

Cubitt Consulting                                                                 0207 367 5100
Caroline Merrell
Russell Lindsay  

 

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 finance. Its 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.