Sugar in 2013: Any Change in the Outlook?
At first glance it looks as though sugar will be in for quiet year. However, as prices fall so too does the incentive to produce, while demand will be encouraged by rising affordability.
Thoughts about Price
- The sugar market has now almost completely surrendered its premium to the ethanol market: there is virtually no food premium to the value of cane for energy. This is a clear indication of the market’s confidence in supply and that sugar is not carrying a risk premium.
- Confidence in supply has come from the increase in production and rise in global stock levels that we have seen during 2011/12 and expect for the 2012/13 season, which will return the stocks-to-use ratio in sugar to 2005/06 levels.
- Though we regard much of the supply side news as priced in, the futures market is still pushing to the downside. This positioning could mean that the market may respond more aggressively to weather shocks than the fundamental balance sheet would suggest and shock the consensus.
“With sugar prices approaching cost of production, producers will be under pressure to generate returns and consumers should continue to benefit from rising affordability.” Toby Cohen, Czarnikow director
Growth in Consumption
- High sugar prices reduced the demand for sugar and, indirectly, the demand for ethanol.
- Brazilian ethanol usage has been on the decline as high sugar prices have drawn cane away from ethanol production. The fall in ethanol production has in turn driven a decline in usage despite on-going sales of flex-fuel cars.
- We had expected sugar to take market share from HFCS/alternative sweeteners in a number of markets in 2012. Importantly, the anticipated swing in China failed to materialise, as government policy in the form of a strong sugarcane price and domestic sugar restocking ensured sugar failed to capture as much sweetener market growth as had been hoped.
- With global sugar prices expected to remain weak in 2013, we continue to expect sugar to attract market share from alternative sweeteners this year and also encourage increased consumption in developing markets, which should lead to a general rise in disappearance.
Growth in Production
- Global production has risen by around 30m metric tonnes since the low point of the 2008/09 season, via an increase in cane planting and greater attention to cane quality.
- However, investment in new processing capacity has been limited and, looking at global production in aggregate, we can see that the rate of growth in production is already waning.
- With world market prices now approaching costs of production in most exporting countries, production could fall into decline in the 13/14 cycle.
“The more comfortable balance sheet has seen the market become more confident in supply. However, the large short speculative futures positioning leaves the market vulnerable to shocks against the bearish consensus.” Peter de Klerk, Senior analyst
The Need for Agricultural Credit
- Lower sugar prices in 2013 will adversely affect the earnings outlook for the global sugar industry.
- Production costs are also likely to continue to increase, which will lead to rising demand for agricultural credit coupled with an increase in risk for lenders.
- In the years following the Global Financial Crisis, access to agricultural credit has become harder to obtain and with sugar prices now at close to cost levels, the appetite to lend is likely to decline.
Though at first glance it looks as though sugar will be in for quiet year in 2013, prices have fallen to levels at which energy and sugar prices are converging with industry returns under pressure.
In many countries the incentive to expand has waned and the next phase of the market will involve realigning consumption growth with supply.
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