Sugar production looks set to remain stubbornly above demand for at least another 12 months, despite a halving in global prices, as mills in top exporter Brazil are forced to keep supplies flowing to recoup massive investments.
Also governments in many other countries have shielded their growers from the prolonged decline in prices driven by a global glut.
“If I have invested half a billion dollars to build a sugar mill and plantation in Brazil, can I shut it down if prices fall? No,” said Pierre Sebag of London-based consultancy Sugar K Ltd.
Sugar futures on ICE slipped last week to 16.17 cents a lb, their lowest level in almost three years and less than half of their roughly three-decade peak of 36.08 cents in February 2011.
Sugar prices has been moving down slowly in recent months and are likely to stay depressed, in what Sebag described as “a slow death”.
One factor that could significantly reduce the sugar surplus would be a major shift in Brazil toward production of ethanol from sugarcane, but such a shift would require the price of ethanol to rise substantially from current levels.
Analysts at London-based commodities house Czarnikow, in their first forecasts for the 2013/14 marketing year, predict a third straight year of sugar surpluses after a sustained period of high prices encouraged farmers to sow sugar.
Fabienne Pointier, a sugar analyst at information and data provider Platts in Lausanne, said she understood from Brazilian mills that they would continue producing as long as prices were above 0.32 Brazilian reais per lb (14.9 U.S. cents).
A weakening in Brazil’s currency also has helped support production of sugar, which is priced in dollars on the international market.
SUPPORTING THE FARMERS
Pointier said the cane being harvested this year was planted in 2012 when prices were still attractive.
“As cane prices in most producing countries are linked with 2013 sugar prices, we could expect growers to receive the signals to decrease their cane production by the 2014/15 crop,” she said.
About 80 percent of the world’s sugar production comes from cane, which thrives in tropical and sub-tropical conditions. The rest is from beet, which is grown in temperate climates.
A number of countries including Thailand, India and China have policies aimed at supporting cane farmers, which help cushion them from the slide in international prices and delay a shift to another crop.
“Stronger cane prices hide the world market signal that you need to slow down production,” said Stephen Geldart, a senior sugar analyst at Czarnikow.
Sebag estimated that more than two thirds of sugar growers around the world benefited from support prices.
A senior London-based sugar futures broker said he believed the global sugar market could remain in surplus for another couple of years, which would make this bear market one of the longest for sugar in the past 20 years.
Traders said, however, that if mills boost the share of cane in Brazil to produce ethanol instead of sugar, availability of sugar on the world market would tighten and signal an erosion of the surplus.
According to the latest data from Brazilian cane industry group Unica on Tuesday, late May rains and a shift by Brazilian cane mills to favour ethanol production has dragged on sugar output in the current harvest in the main centre-south cane region.
In its latest bi-monthly report on cane crushing, Unica said sugar output in the centre-south fell 11 percent in the second half of May to 1.84 million tonnes from 2.06 million in the first half of last month.
Unica said mills had used 58.2 percent of the cane harvested for ethanol production, up from 56.5 percent in the previous fortnight.
“Lower sugar prices – some traders expect prices to ease to 13 cents a lb levels in the coming months – combined with strong ethanol prices would give even more incentives for mills to produce ethanol,” Pointier said.