Surplus Sustained: A Third Look at the 2013/14 Balance

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2013 is drawing to a close with a decidedly negative feel to commodity markets. The negative sentiment in the broader commodity markets correlates with a decline in growth rates in the fast growing emerging economies.

Within the sugar market, the pressure has come from the perception of ample supply and strong surpluses, fuelled by market talk of large Indian exports, expectations of a reduction in Chinese import demand and a record CS Brazilian cane harvest. However, with production now trending lower and consumption growth returning, the decline in market pricing is doing nothing to address the underlying problem that is facing the sugar industry: The continued destruction of shareholder value.

Production

Despite changes to individual country production outlooks there has been little change in aggregate

“Our third assessment of the 2013/14 production outlook continues to show the balance sheet moving towards equilibrium with a much smaller surplus than in previous seasons.”

Stephen Geldart, Senior Analyst

  • Cane sugar production remains almost static year on year at 147.4m mtrv, 838k mtrv lower than in 2012/13 and virtually unchanged on our August estimate.
  • We continue to project falling beet sugar production, now at 34.4m mtrv, the lowest level since the 2010/11 season and a decline of 13% since the 2011/12 production high.
  • Consequently, we forecast 2013/14 production at 181.8m mtrv unchanged on our previous forecast in August.

Consumption

  • Consumption growth remains a key factor in the market. We now expect 2013 consumption to reach 175.7m mtrv, up from our estimate of 175.2m mtrv in August and our initial estimate of 172.3m mtrv. Our current estimate represents a 2.6% year-on-year increase in consumption as lower prices stimulate further demand.
  • The growth rate in 2013 is the strongest we have seen since the 3.5% in 2008/09, but still below the 10% increase in raws trade seen in the 2012/13 season.
  • For 2014 we are forecasting a further increase in consumption, to 178.9m mtrv, up 1.9% year on year. This growth rate is below that seen in 2013 and suggests that there is further consumption growth to be uncovered in the coming year if the market continues to trade at depressed levels.

“With production now starting to decline and faster rates of consumption growth returning,  we believe that the continued destruction of shareholder value will ultimately become a problem for the market.”

Toby Cohen, Czarnikow Director

Despite some interesting developments across major crops since our last Review, the size of our forecast surplus remains largely unchanged at 2.1m mtrv including an allowance of 1m mtrv to account for unrecorded disappearance. Our forecast for this season’s surplus is at the lower end of analysts’ estimates reflecting our belief that the market is understating the growth in consumption that has taken place in response to low prices. However, there are also some differences in terms of our expectations for production:

Following dry weather in October and November it appears that the tail of the CS Brazilian crop will deliver and the industry will come close to meeting the size of cane crush hoped for in the middle of the crop. The tail to the Australian crop was another strong performer, and we expect better results than our initial expectations in Mexico and the USA, putting the NAFTA region into surplus for a further year and continued strain on the sugar program.

These views are generally accepted though we have recently downgraded our forecast for this season’s crop in India reflecting poor cane development and rising diversion in the state of Uttar Pradesh. This differs from consensus thinking.

India Risks

  • Our view of Indian production has become more negative given the challenges facing the industry.
  • This is in contrast to the official position that following a better-than-expected monsoon production will be in the region of 25m tonnes.
  • The main driver for this change in outlook comes from the weather in particular shorter-term effects in the state of Uttar Pradesh.
  • However, economics has taken preference to weather as interest has focussed on the delay in the start of crushing in most key cane-producing regions as the mills grapple with high cane prices and low domestic and world market returns, which threaten the viability of the sector.
  • The divergence in views on production is largely down to the impact of the monsoon on cane performance in the state of Uttar Pradesh: We are concerned that cane yields in central and eastern regions of UP are significantly lower than previously expected as  a consequence of the distribution of the monsoon rainfall.
  • Furthermore, delays in crushing following the announcement of a high cane price saw farmers selling a higher than expected proportion of cane to artisan producers (at a discount to the state cane price) to generate cash and allow planting of wheat as a secondary crop.
  • We therefore now estimate sugar production in UP  at 7m tonnes, down from our previous estimate of 7.8m tonnes and from last year’s production of 7.7m tonnes.

Conclusion

  • Though the gap between production and consumption is narrowing in the 2013/14 season, sugar prices remain under pressure reflecting another year of surplus production.
  • It is widely recognised that the surplus this season will be smaller than last year though another year of surplus production is not positive for prices. However, with the balance sheet edging its way towards equilibrium and production risks returning, we believe that value needs to return to the market place.
  • Current prices are damaging shareholder value and, as a consequence, investors will be discouraged from entering the sugar economy unless they can capture higher returns to compensate for the risks.
  • This is true for producers the world over though most apparent in Brazil where assets have been trading well below replacement cost. 

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