A Tighter Sugar Market: Re-thinking the 13/14 Balance Sheet

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Despite the widely held view that prices would fall sharply in 2013 this has not happened to anything like the extent predicted.

Our view is that the explanation has to be logical: The surplus in sugar is nothing like as large as it is assumed to be.

  • What we believe has happened is that the falls in price and increase in affordability have been enough to encourage a sharp rise in marginal demand.
  • Demand for sugar has been a lot stronger than we had been expecting. Over the past 12 months we have been consistently surprised by the strength of physical demand and the growth in global trade that we have observed.
  • The strength of global trade in physical sugar, which is up over 10% year-on-year is a good indicator of the way in which consumers have reacted to low prices.
  • Physical values have stayed firm as futures prices have softened.
  • Physical sugars are now trading at a premium, not a discount, to the futures market which is not consistent with projections of surplus supply.

“Our view is that the balance sheet is already changing - the gap between production and consumption has narrowed. The strength of the physical market is telling us that the supply side of the market, rather than being challenged to find demand, is actually challenged to meet demand.”

Toby Cohen, Czarnikow Director

Production

  • Our second estimate for the 2013/14 season shows a much smaller production surplus 2.0m mtrv, which is down 1.9m mtrv from our initial estimate of 3.9m mtrv.
  • Both numbers include an allowance of 1m mtrv for unrecorded disappearance.
  • The revised figures indicate a greater fall in production than we had first projected at 182.8 m mtrv now down to 181.8m mtrv vs last year’s 185.8m mtrv as producers adapt to lower returns.
  • The fall in production is led by beet sugar production, which we forecast at 34.3m mtrv, the lowest level since the 2010/11 season and the third successive year of falling production.
  • Cane sugar production is now expected at 147.5m mtrv, compared to 148.4m mtrv in 2012/13 and 139.8m mtrv in 2011/12. At this point in the cycle the decline is largely driven by lower expectations for CS Brazilian production.

Consumption

  • It is on the consumption side of the balance sheet that we see the greatest changes coming through.
  • We are now working with an annual increase in consumption of 2.3% as we see the market returning to a high growth phase in usage.
  • This is, however, less than the 10% increase we have observed in global trade during the past 12 months.
  • We consequently believe that we are still being conservative as in aggregate we have consumption rising by just 2.3% in 2013 and 2% in 2014. This is also much less than the fast growth periods of the past decade.
  • Understanding sugar consumption is one of the greatest challenges facing analysts as data is very difficult to verify. As a consequence, there is a natural tendency to adopt a conservative approach, which results in consumption being underestimated.
  • Growth is most easily observed via the physical markets where it is possible to see how import volumes impact on price.
  • This year we have observed strong import flows into a range of Asian, African and Middle Eastern markets that have responded well to improving affordability.

CS Brazil

  • This year’s Centre-South Brazil crop has to date underperformed versus our initial expectations.
  • We had expected that the industry would crush 595m tonnes cane this year, giving 36m tonnes sugar.
  • However, we have recently downgraded that view to 585m tonnes of cane and 34.1m tonnes of sugar.

Australia & South Africa

  • Australian crop prospects have improved, with much of the industry experiencing ideal crushing conditions, given the dry weather.
  • We anticipate a similar crop in 13/14 to last year, with the weaker AUD helping to support grower earnings.
  • The South African 13/14 crop continues to perform well, and the industry is now expected to produce 2.57m mtrv of sugar, which would be a 20% increase on what was achieved last season.
  • However, the sugar industry has made an application to increase the import duty as it claims that it is cannot compete at world market prices.

Europe

  • The EU has had a tough growing season and yields are forecast to be below last year’s results.
  • Total beet area is down, with Italy and Germany reporting the most significant reduction in area planted. We have, however, revised up our forecast of UK beet sugar production following the replanting of malformed beet.

“With the physical market tight and the balance sheet now much closer to equilibrium the biggest question for the market is what is a fair value for sugar today?”

Stephen Geldart, Senior Analyst

Conclusion:

  • Global consumption and global trade are at record levels as prices have fallen to levels that are below the costs of most of the world’s producers
  • Demand has been stronger than we had predicted and we have revised up our forecasts for global consumption to take this into account

 

 

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