Sugar Prices at 20¢/lb - What Happens Now?

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Sugar prices are back around 20¢/lb as risk is going out of the sugar balance sheet, helped by rising production and soft demand.

The market should be encouraging consumers to use more sugar as prices fall, as well as discouraging the substitution that has knocked demand during the bull market phase.

Sluggish demand

  • The process of consumers responding to demand is never as quick as the market would like and results in the risk of prices overshooting lower as demand recovers.
  • The first part of the 2000s saw prices range bound in the 10 cent area. This price trend changed at the end of the decade, with 3 successive global deficits taking the world market to an average price of 27.40¢ in 2011 from 12.10¢ in 2008
  • Hydrous ethanol sales are today down 35% from their peak in 2010 and around 50% less than our estimate of the total size of the market.
  • In addition, the current hydrous ethanol price is around 17¢ in No11 sugar terms, which is someway below the 20¢ level.

Corn sweetener substitution

  • Since 2008 high sugar and low corn prices have driven industrial consumers towards corn sweeteners; the average spread between corn and sugar was 3.2¢/lb in 2007 while this average stood at 15¢/lb in 2011. It has since fallen to around 7.6¢/lb currently, and while the spread is still more than double historic levels.
  • In Mexico, the imminent start of the harvest, which is expected to yield the biggest crop in the last 4 years, could see prices converge.
  • In China, corn sweeteners represent around one third of total calorific sweetener demand. If sugar prices fall there is the potential for a rise in sugar demand at the expense of corn sweeteners.
  • With a bigger cane and beet crop anticipated in 2012/13, sugar prices should fall, though this is contrary to government policy, which has been to support farm prices.
  • We project imports to halve to around 1.5 million tonnes. However, even this number assumes demand for sugar coming through and if that demand growth is stunted by sugar prices remaining high relative to alternative calorific sweeteners then import needs could be lower still.

Conclusion

  • Sugar prices are back to around 20¢ but the market is not yet back to levels that will be encouraging consumers to use more sugar or ethanol.
  • The 25m mtrv2 stock drawdown over the three successive deficit years has seen growth in sugar consumption reduce to an annual average increase of 1.2% between 2008 and 2012, compared to an average annual increase of  2.9% from 2000-2008 whereas production growth has been rising at CAGR3 of 4.6%.
  • Our estimate of the 2012/13 surplus of 7.1m mtrv, assumes that we will see lower prices in 2013 and that we will also see a rise in consumption in response to lower prices.4
  • In our August review we described how, when taking all of these factors together, it appears that the market is still in the process of surrendering its risk premium.  One month on, we continue to retain this view.

Toby Cohen, Czarnikow director, said: “Demand never reacts as quickly as the market likes. While 2013 may see a return to faster growth rates in consumption this process is often slower than expected”.

Peter de Klerk, an analyst at Czarnikow, said: “Thus far the surplus it is not being resolved through higher consumption, though pipeline stocks have risen. Our outlook is therefore for the relationship between domestic sugar market and world market values to become more strained in the short term”.

1. All prices quoted are in USD unless otherwise stated.

2. metric tonnes raw value

3. Compound Annual Growth Rate

4. Review no.2061 e.151

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