A SWEET OR SOUR YEAR FOR SUGAR?
The beginning of the year is a good time to look forward to what sugar prices may do over the coming twelve months.
Over the past seven seasons, sugar has been produced in abundance for five of them and not enough for the remaining two. However, the surpluses have been probably about twice as large as the deficits. Stocks are adequate, especially as a return to surplus is expected in 2017/18. Nevertheless, global production is expected to be some 9 million tonnes below consumption this season and some supply tightness has been predicted. Hence we had the price rally seen in September/October. Prices then declined as it became apparent that 2017/18 could herald a return to a global surplus and India was unlikely to be an importer. However, just after Christmas it became apparent that Indian sugar production was likely to be less than anticipated and expectations of imports increased again.
The global situation is neatly summed up by this current situation in India. Two seasons of poor monsoon has resulted in sugar production collapsing in the current season. This has resulted in some calling for import duty to be cut to allow imports, despite reasonable stocks being held and a return to record levels of sugar production next season. The government seems caught between a rock and a hard place. They want domestic prices to remain relatively firm so local mills can improve profitability but cannot allow prices to increase too much to upset the population. They are maintaining that stocks are adequate to see the country through until the next harvest which promises to be early and large. Others are calling for imports, saying the country is in danger of running out of sugar before too long unless imports are made viable by lowering import duty. It can be argued that some Indian traders have a vested interest in the import duty being cut. Some observers estimate up to three million tonnes of raw sugar has been imported for tolling over the past few months. Currently, the white sugar produced has to be exported. However, the tollers would be in an excellent position if imports were allowed.
Brazil’s 2016/17 sugar production has been in line with expectation. The just-ended current season saw the Centre-South produce 35.25 million tonnes. The cane crush was under 1% higher than in the previous season but sugar production was over 15.5% higher. This was due to a much higher than normal sugar/ethanol split mainly due to the weakness of the Brazilian Real.
Currently there are no great concerns over supply tightness despite now being well into a deficit season. No decision from Indian government as this article is written but the situation might change if India becomes a net importer although this may not happen until later this year when the next Brazilian CS harvest will be underway. However, total sugar production estimates continue to be lowered so the likelihood of imports is rising.
Nevertheless, prices are likely to remain firm over the next few months while question- marks remain over India and traders await the start of the next Brazilian CS harvest. The investment funds have built a huge net long position and continue to maintain it. albeit somewhat reduced from its record level of over 230k lots last year. Whether prices can climb back to the ‘highs’ seen at the end of September remains uncertain but it would seem unlikely unless an unforeseen weather problem develops.
22 | ADMISI - The Ghost In The Machine | January/February 2017
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