2016/17: Back-to-Back Deficits
- 2016/17 is forecast to be in production deficit of 9.8m metric tonnes raw value (mtrv).
- This follows 2015/16’s 12.5m mtrv deficit, which was the largest seen since 2008/09.
- This means that across the two seasons combined, global sugar stocks will be drawn down by more than 22m mtrv once an allowance has been made for unrecorded disappearance.
- The combined stock-build of the previous 4 seasons was 25.9m mtrv; almost all of this stockpiling now looks set to be unwound.
“As global sugar stocks draw down the market’s ability to respond to adverse events reduces. For this reason we believe price volatility will increase in the coming months, and that higher prices are here to stay for the short and medium term.”Stephen Geldart, Analysis Manager
- Ahead of the 2009-11 bull market in sugar, consumption globally grew at a rate of around 3% per year, helped by booming pre-financial crisis GDP growth.
- Higher sugar prices impacted affordability in 2009-2011 and saw global sugar consumption growth fall to around 1% in this period.
- In the subsequent sugar bear market sugar consumption recorded on average 2% growth between 2012 and 2014.
- Despite prices continuing to fall in 2015 we think consumption growth fell to around 1.5% a year and are sustaining this below-trend consumption growth rate in 2016 and 2017.
- This is mostly due to the slowdown in Emerging Market growth in recent years, alongside the decline in oil economy finances.
- We expect production to rebound in 2016/17 to 177.8m mtrv (from 172.9m mtrv in 15/16).
- This growth is driven by beet regions (beet farmers are able to respond quickly to price as the crop is annual) and CS Brazil.
- Beet production is forecast to rise from 34.4m mtrv to 37.9m mtrv, which if achieved would be the third largest sugar production achieved from beet on record.
- Meanwhile, in CS Brazil we expect record sugar production owing to high cane acreage, good growing conditions, one of the fastest crop starts on record and the attractiveness of sugar returns over ethanol.
- Other cane regions are likely to remain depressed in 2016/17 following difficult weather conditions.
- Thailand, India, Southern Africa and Central America are all expected to show lower sugar production year-on-year following drought.
- It is primarily this weather-related performance which has ensured the world remains in heavy sugar deficit in the coming cycle.
- 2016/17 cane availability was high owing to last season’s rain-interrupted harvest tail.
- Dry weather in April helped mills start crushing operations exceptionally early, and by mid-May cane crushing was 58% ahead of the previous year.
- While rainfall at the end of May & start of June disrupted harvesting, the dry forecast for July and August is raising hopes that 628m tonnes cane may be crushed.
- Sugar is likely to be the dominant product given it currently pays more than 600pts better than ethanol; dry weather is likely to help sucrose concentration in the cane.
- We therefore expect CS Brazil to produce 35.5m tonnes of sugar this season, which would be a new record.
- However, this forecast is dependent on the weather remaining beneficial for cane crushing throughout the season.
- 2015/16 saw the lowest production in 4 decades following low sugar returns and drought in Central Europe.
- We expect to see an 8% rebound in beet acreage in the EU in 2016/17.
- Beet yields are now critical for sugar production; weather in June in NW Europe was unusually rainy.
- While this could be beneficial for beet if followed by sunny spells in July and August, waterlogged fields could see reduced yields if they do not dry out.
- Nevertheless, we expect sugar production from the EU-28 to reach 16.6m mtrv in 2016/17, an improvement on 2015/16’s 14.6m mtrv.
- It seems that 2016/17 will be the second successive year of decline in Thai cane crushing.
- This follows exceptionally dry weather across cane regions, particularly in the North and Eastern regions, which contribute around a quarter of available cane.
- Despite a higher acreage planted to cane in 2016/17, crushing could fall to 90m tonnes from 94m tonnes in 2015/16 and 106m tonnes in 2014/15.
- The dry weather and consequent cane difficulties are also likely to impact sucrose yields, which could fall from 10.4% to 10.2% in the coming season.
- At this stage we are only likely to see a marginal recovery in cane performance if we get high volumes of rainfall in the second half of the year.
- We believe that sugar production will fall to 6% to 9.8m mtrv from 10.4m mtrv last year.
- India looks set to fall into domestic deficit again in 2016/17, after 6 years of surplus.
- This follows back-to-back droughts in 2014 and 2015 in the south-west of the country, where key cane growing states Maharashtra and Karnataka are located.
- For cane, the result has been that farmers have been unable to plant as much acreage as they would wish, and it is likely that cane development has also been affected.
- The extent of the problems is likely to become clearer towards the end of the monsoon, perhaps at the end of August.
- However, at this stage we believe that some of the difficulties are irrecoverable and forecast India to produce just 25.4m mtrv in 2016/17, the lowest since 2009/10.
- With production at 177.8m mtrv and consumption at 187.1m mtrv we expect the world to be in sugar production deficit of 9.8m mtrv in 2016/17.
- This includes a 500k mtrv allowance for unrecorded disappearance.
- This follows a 12.5m mtrv deficit in 2015/16, meaning the 2-year cumulative drawdown is more than 22m mtrv.
- This is only 2.5m mtrv less than the 2-year stock drawdown seen in 2008/09 and 2009/10 which drove the market to multi-year highs above 30c.
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