Consumption statistics, the production surplus and the market
The surprising thing about the sugar market today is that analysts are in consensus: The balance sheet is in surplus and stock levels are rising.
Our own analysis is broadly in agreement but we have growing doubts about the size of the surplus because we are increasingly convinced that underlying consumption is higher than the market is estimating. As sugar prices have fallen affordability has increased and in this context it is very logical that price sensitive consumers should be the fastest to respond. But there is also more. What is also very clear is that the physical market is not behaving in a way that reflects an oversupplied market. Import demand and trade have been at record levels and, though futures prices are lower this year than last, it is very interesting that the futures market is not pricing the surplus into the spreads. There is no financial incentive to carry.
While we can identify a rise in inventory levels in a number of areas the volumes are much less than the cumulative surpluses in the global balance sheet pointing towards a much greater rise in general disappearance. Identifying this is the challenge.
This latest review of the 2012/13 crop cycle sees global production increasing. The main adjustment on the production side is the increase in CS Brazil output following a successful end to the crushing season. Production prospects in a number of other origins have also improved, but the 2012/13 cycle has nonetheless seen output stagnating, with global production growing at around 2.9% compared with 6.4% and 7.8% in the previous two seasons.
Year on year production growth has slowed significantly this year
The southern hemisphere cane industries, which represent around 30% of global production, have experienced a mixed season. CS Brazil production finished with a new sugar production record of 34.1 million tonnes. In contrast, Australian and South African production fell marginally short of expectations, as early rains in Africa and broader agricultural issues in Australia proved difficult.
The focus for the next couple of months now shifts to the Northern Hemisphere cane crops, with India, China and Thailand key to the outlook. With over half the cane processed in each, the outlook for Indian production is improving with better than expected yields reported for both new plantings and ratoons (27.5m mtrv vs 25.9m mtrv in November). Overall, the cane production total for the 2012/13 cycle has risen by 1.5 million tonnes to 146.4m mtrv since November. As noted earlier, the majority of this change is to be found in CS Brazil and India. Meanwhile, global sugar production, from both beet and cane has risen to 184.2m mtrv from 180.6m mtrv in November and 179.0m mtrv last year. This represents an increase of 2.9% year-on-year.
Throughout the current cycle, we have pushed to quantify the changing dynamics on the consumption side given that the bull market phase from 2009 had resulted in demand destruction and displacement, and consequently the end of that phase in the market should enable consumption growth to return to more usual levels. With record imports of sugar during the second half of 2012 and then continuing into early 2013, traded volumes in the physical market appear inconsistent with a slow consumption growth environment.
We had initially attributed the take-up of increased import demand as a function of the carry structure and cheap freight environment in Q4’12. But what has also become clearer is that though some of this volume was directly related to the structure of the market, the physical whites market has been stronger than we had expected pointing towards increasing consumer activity. This activity has subsequently impacted physical and futures prices and today all physical sugars are trading at parity or at a premium to the futures while the futures structure during the first half of 2013 has been flat to mildly backwardated. The physical market is quite clearly reducing the incentive to hold stocks and pointing towards increased consumer activity as providing a notable impetus behind for these greater physical flows. Our belief is that consumption is also rising in markets that are much less visible. As global trade represents just over a quarter of global consumption, observing growth is set to remain difficult in the short term. Our estimate for consumption during 2013 calendar year is, at this stage, projected at 174.1m mtrv, a 1.8m mtrv increase from our November estimate while our figure for 2012 consumption has increased to 171.1m mtrv. We have also made a temporary increase to the allowance that we make for unrecorded disappearance and losses to 1.0m mtrv from 0.5m mtrv, reflecting the unknowns that we have still to identify.
In total we are therefore forecasting a global production surplus during the 2012/13 season of 9.1m mtrv. Despite the consistency of the statistics it is interesting that the structure of the curve seems to be telling us that the surplus has been largely addressed by the fall in the price. Looking forward, the accumulation of some stocks will overall leave the market better placed to respond to emerging demand but also signals that the surplus itself has in part been addressed by the fall in price. With global sugar prices already at levels below cane prices in many producing and exporting countries it will be interesting to see how production responds in the next cycle.
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