The world should end this season with its first sugar surplus in four years, but you wouldn’t know it from how prices have surged.
Futures hit a six-year high last week, threatening more inflationary pain by increasing the cost of making baked goods, candy and soft drinks. While top exporter Brazil is set to collect a much bigger crop, those supplies won’t arrive until harvesting starts around April — and right now the market is tightening.
That’s because weaker output will likely force India to cap exports, while European production has been hit by drought and now faces uncertainty after a pesticide ban. Plus, Indian mills are diverting more cane to make ethanol and China’s reopening could lift demand.
There are already signs that sugar’s rally is feeding through to higher retail prices for goods in grocery stores in the US and Europe.
“The biggest concern is stocks are tight globally,” said Rahil Shaikh, managing director of trader Meir Commodities India Pvt. “As of now the curtains are down on additional Indian exports. If there is any shock from Brazil then the world market will be on fire.”
Raw sugar added 0.3% to 20.73 cents a pound in New York on Tuesday. Futures reached 21.86 cents on Feb. 1.
Here’s what’s happening in the market:
Indian Exports
How much the No. 2 grower will export has been a key question. The Indian Sugar Mills Association last week cut its shipment outlook to about 6 million tons for this season after bad weather hurt yields, indicating the government is unlikely to allow extra volumes.
Plus, India’s push to boost ethanol production could see more cane diverted to make the biofuel, rather than sugar.
Brazil’s Crop
Brazil should collect one of its best-ever crops, after drought and frost hurt previous harvests. But good weather would allow processing to start early, increasing competition for terminal space during the peak shipment period for record soy supplies — so producers and traders are bracing for port congestion.
Limited export capacity may push up physical sugar premiums, said Ana Zancaner, an analyst for trader Czarnikow Group Ltd.’s Czapp app. An increase in fuel prices recently raised concerns that Brazil’s mills could turn more cane into ethanol, although sugar remains more profitable for them.
European Headache
Europe is already having to import more sugar after a heat wave and drought hurt output. Now, a European Union ruling reinforcing a ban on neonicotinoids — a type of pesticide considered harmful to bees — further threatens production.
In a sign of tight supply, traders say some European food companies are still paying more than £1,000 ($1,204) a ton for refined sugar in the spot market. That’s much more than usual, squeezing margins.
Other Growers
Bigger Thai supplies won’t be enough to fill the gap left by a smaller Indian harvest and any Brazilian shipment delays, said the Thai Sugar Millers Corp.
In the US, beet-sugar supply disruptions boosted refined sugar prices, filtering through to candy and baked-goods costs. There’s also a smaller harvest in Mexico, the main supplier to the US.
Demand Boost
China’s reopening should increase demand, said Michael McDougall, managing director at broker Paragon Global Markets. That’s happening as food companies that tapped stockpiles in recent years now jostle for limited supply.
The tightness is a big worry for the food and beverage industry in top importer Indonesia, which exports goods like instant noodles and sugary drinks. It may have to turn to Brazilian and Australian sugar to plug any gap from India, the Indonesia Sugar Refiners Association said.
What Else?
Excessive speculation fueled the recent rally, and a likely surplus will probably lower prices, said Somit Banerjee, head of trading at Dubai-based refiner Al Khaleej Sugar Co.
On the supply side, other more lucrative crops pose a threat to plantings.
High grain prices have “been taking both beet and cane area in a number of countries,” Paragon’s McDougall said.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
More Commodities Topics >
