Thursday, April 14, 2011

Global Recovery in Sugar Production - Apr 14th

Global Recovery in Sugar Production
April 14th, 2011

Sugar has been the worst performing commodity so far in 2011, and this morning fell to a six-month low.  Despite the weakness, it is still very expensive from an historical perspective (see chart).  The last few years have seen huge price increases as the world’s supply fell into two consecutive years of deficit, the deficit in 2008 being particularly severe leading to a significant draw from stockpiles of over 11 million metric tonnes.  The last time that sugar prices pushed above $0.20 per pound (aside from the past couple of years), was in 1980.

Long-Term Sugar Prices
Courtesy of Bloomberg

A Little Bit of Background

The two most significant producers of sugar cane are Brazil, the top producer and source of around 25 percent of global production, and India, which produces around 16 percent of the world’s sugar. 

Brazil has leveraged its wealth of sugar to transform its energy sector and create the world’s most developed ethanol market.  The government requires all gasoline to contain at least 25% ethanol, and most cars can run on 100% ethanol.  As a result, most of their sugar crop goes to ethanol production, with the current split estimated to be between 45-47% sugar and 53-55% ethanol. 

India, which usually produces enough sugar cane to meet its domestic demand, became a net importer in the 2008/09 season when drought significantly reduced its crop.  The situation got slightly better the next year, but it was still unable to produce enough sugar to satisfy its own needs.  This year however, production has rebounded and it is has once again began to export small quantities to the world market.

High Prices Make Great Fertilizer

The three decade high in sugar prices spurred producers to ramp up production this year, and large crops are expected from India, which increased acreage by 5 percent, and Thailand, which boosted production by as much as 13 percent from last year.  All told, global supplies remain very tight, and the stocks-use ratio is currently at the lowest level in at least 30 years, at roughly 16.5%.  The outlook is improving however, and barring significant problems with the Brazilian harvest (which is currently being delayed due to unusually wet weather), there appears to be few risks that could push the market to new highs. 

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

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