Sugar prices hovering near 6-year high amid concerns of supply dearth

SUGAR futures have pared some gains since the commodity hit a six-year high of US$0.2209 per pound on Feb 27, but market watchers believe prices could remain high in the near-term. 

Concerns over sugar supply globally have been the key trigger for the surge in the commodity’s prices.

In India, the Indian Sugar Mills Association has revised downwards the expectations of the country’s production – to 34 million tonnes for the current season running from October 2022 to September 2023, from 36.5 million tonnes previously.

The move comes as sugarcane crops were affected by excess rains in the states of Maharashtra and Karnataka.

Ethanol prices in India have also been on the rise, and this has encouraged the diversion of sugarcane for ethanol production rather than sweetener production. The Indian government plans to increase the biofuel blend from 10 per cent to 20 per cent by 2025.

Rabobank analysts said that even though more mills in India are open now compared with a year ago, the production pace is expected to “decelerate and lag behind last year’s”.

“Prices in the coming weeks will depend in large part on India’s harvest pace,” the analysts said. 

According to data from Statista, India was the world’s largest sugar producer in the 2021/22 season – with about 36.9 million tonnes of sugar. Brazil came in second with 35.4 million tonnes, and the European Union (EU) at 16.5 million tonnes.

Adding to supply woes is France, which is the EU’s second-largest sugar producer. Fitch Solutions’ analysts said a decline in French sugar production was already anticipated in 2023/24 due to smaller plantings.

Concerns over the severity of a reduction in French production have intensified after the government decided it will no longer allow the use of the pesticide class neonicotinoids. 

Other available alternative pesticides are inferior and have demonstrated limited ability to protect France’s sugar crop, said Fitch. 

Rabobank analysts said the ban might cause sugar yields in the EU to “suffer” once again. 

“With some government help, a reduction in area will probably be avoided; but yield losses to yellow virus are inevitable. This will support the white premium in the coming years, with very little hope of seeing any significant EU sugar export programme in 2023/24,” said the analysts. 

S&P Global analysts, meanwhile, said French growers are still lacking clarity about the compensations announced by the government in case of losses by yellow virus. 

“Without any guarantee, some farmers are likely to abandon the crop,” they said. 

Ahead of the sowing period, the analysts added that soil moisture is at low levels in France, the United Kingdom, Belgium and the Netherlands. “The rainfall during February in these countries was much below historical norms.”

Fitch analysts expect sugar prices to average at about US$0.19 per pound in 2023, up from US$0.186 per pound in 2022. Rabobank raised its forecasts to US$0.194 per pound for the first quarter, and US$0.18 per pound for Q2. The research house’s forecasts for Q3 and Q4 are at US$0.178 per pound.

Beyond that, prices are expected to be “in line with the forward curve” at about US$0.17 per pound by Q1 2025, Rabobank analysts said. 

They added: “We believe production costs will increase more or less in line with inflation, and that will be supportive of the price at the time. 

“Furthermore, India’s exportable surplus will likely shrink due to the increased diversion to ethanol. If prices drop close to or below the cost of production in major origins, we would risk going into a structural deficit.”

Some reprieve could, however, come from Brazil. The country’s output levels are expected to increase amid rainfall over the sugar belt. 

“Generally speaking, more rainfall is good, but there could be some issues in certain areas where volumes were excessive. In any case, expectations for sugarcane volumes have been going up, and the same can be said of the sugar content and the sugar mix,” said Rabobank analysts. 

Fitch is also expecting a 7.6 per cent year-on-year increase in Brazil’s yields to 38.1 million tonnes. Ethanol prices in Brazil have eased along with fuel prices, which has raised the availability of sugar for sweetener production. 

Closer to home, the United States Department of Agriculture estimates that Thailand will increase sugar exports by 10 per cent in 2022/23 to 11 million tonnes. 

The increase in exports will see Thailand’s share of global sugar exports increase from 15.6 per cent in 2021/22 to 17.4 per cent in 2022/23, said Fitch. But Fitch analysts noted also that on a longer-term basis, Thailand is “unlikely to keep exporting at such volumes”.