Over the Edge? A First Look at the 2014/15 Season

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There is a growing perception that the balance sheet might be about to change. 

The 2014/15 season has been seen as a possible deficit year. Fears have been building around weather following drought in Brazil while producers are feeling the squeeze as prices languish below cost. Despite this production is not responding as quickly as expected.

Production – Close to Record Levels with Beet Rebounding and Cane Gently Sliding

  • We expect 2014/15 production to reach 184.3m metric tonnes raw value, up on 184.0m mtrv achieved in 2013/14 but below 2012/13’s record output of 185.6m mtrv.
  • In 2014/15 we are forecasting a rebound in beet sugar production to 36.3m mtrv from 35.1m mtrv, largely owing to expansion in the EU.
  • However, 2014/15 now looks set to be the first year in seven where cane sugar production will fall; we are currently forecasting it will be 147.9m mtrv, from 148.8m mtrv

Consumption – Low Prices Incentivise Strong Growth

  • Consumption in 2014 looks set to grow by 2.4% to 180.1m mtrv
  • We are forecasting 2015 consumption at 183.8m mtrv, an annual growth rate of 2.1%. 
  • This looks low compared to the previous two seasons; 2015 consumption growth of 3% would add more than 1.5m mtrv to our current forecast.

2014/15 in Deficit  

  • Our first forecast is for the 2014/15 season to be in deficit by 0.5m mtrv. This includes a 1m mtrv allowance for unrecorded disappearance. 
  • However, the risks to production feel more slanted towards the downside given the financial difficulties of producers and awkwardness of the weather so far in 2014. 
  • Meanwhile, our latest estimate of the 2013/14 season is that stocks increased by 2.9m mtrv

“The biggest variable for 2014/15 today is the mix in Brazil. To see a swing towards ethanol, sugar prices need to be low in the short term, which will compound problems for the market in the longer term. The outlook for 2014/15 remains in the balance.”

Ana Carolina Ferraz, Head of Brazil Analysis

CS Brazil – Uncertainty Over Cane Performance and Crushing Capacity

  • Drought is likely to have affected cane development for the current season. 
  • However, the drought has been hard to model as it has been localised. Some regions of Sao Paulo state have been badly hit, but Parana has recently been affected by heavy rains. 
  • Sugar and ethanol returns have not been sufficient to meet operating costs and mills have reduced expenditure, particularly on cane plantings and field maintenance. 
  • Consequently the cane is younger than it’s been in the recent past, but investment in the fields is low and weather conditions have been poor.
  • Given the level of uncertainty we have modelled two scenarios for the CS Brazilian crop. 
  • A stretch target is for cane crushing to be 578m tonnes. Poorer ag yields give 561m tonnes.
  • We are consequently expecting sugar production of 32.6-33.2m tonnes for the season and have adopted a mid-point of 32.9m tonnes in this Review (vs 34.3m tonnes in 2013/14)

India – The Swing Cycle Has Been Suspended for the Time Being

  • India produced more than 26m mtrv sugar for the fourth successive campaign in 2013/14.  
  • Maharashtra produced 7.8m tonnes as farmers in the south crushed immature adsali cane after just 10 months in order to boost current-season incomes. 
  • Production in Uttar Pradesh was 13% below last year’s at 6.4m tonnes after cane yields were hit by a sporadic monsoon. 
  • We see further strength in the 2014/15 Indian crop, and forecast production at 27.9m mtrv 
  • Acreage in Maharashtra will increase as fallow land is replanted and as drought fears fade. 
  • In Uttar Pradesh we are hopeful that last year’s cane growth problems will not be repeated, though this year’s monsoon has been a little disappointing so far.
  • Domestic prices in 2014 have been below cost, which is bad news for mills but will boost consumption, which we are calculating will grow at 3% for 2015, to 27.2m mtrv.

China – Strong Cane Crushing Belies Producer Difficulty

  • The 2013/14 cane crop was the second highest on record, at 13.8m mtrv.
  • This is partly due to farmers crushing seed cane as cane prices might not rise next season. 
  • Beet producers endured another difficult year; production was down 31% at 811k mtrv
  • Domestic prices have languished below cost for the entire season and the Chinese Sugar Association estimates the industry will lose RMB 10b in the current season. 
  • For the 2014/15 season we expect Chinese sugar production to contract, to 13.2m mtrv.
  • In 2015 we estimate consumption will grow by 4% to 17.6m mtrv.

Thailand – A New Record Crop, but Farmers Under Pressure

  • In 2013/14 12.1m mtrv sugar was produced – a new record.
  • Given the surplus market the trade have struggled to place this sugar at destination.
  • Heavy losses on a government rice stocking programme could limit support given to farmers. 
  • Farmer returns from sugar have fallen by more than 40% since 2011/12, but are above those of rice and cassava. 
  • We expect to see growth in sugar production in 2014/15, to 12.8m mtrv.

“Production has been strong but this reflects the support that many industries have received and the degree to which loss-making producers can continue to operate as long as variable costs are covered. But this cannot continue indefinitely.”

Stephen Geldart, Senior Analyst

EU – Strong Plantings Leading to Bumper Crop

  • We are forecasting production at 17.7m mtrv, up by almost 5% on last year. 
  • A key reason for this is the change to the European Sugar Regime from October 2017. 
  • Producers are already battling for market share ahead of quotas being removed. 
  • However, EU domestic prices have been falling, to below €600/tonne. 

Conclusion

  • Despite low prices, pressure on farmer incomes and destruction of producer returns, we are yet to see the large response in worldwide production which might be expected. 
  • At this early stage it looks as though production could grow during the 2014/15 season, even though we are forecasting a small deficit thanks to robust consumption growth. 

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