Raw Sugar Prices Set to Normalize in 2017

Brazil expecting record output that would shift a global supply deficit into positive territory

Raw sugar prices, which surged to a more than four-year high in late 2016, is set to normalize in 2017 as Brazil’s main producing region is expecting a record output that would shift a global supply deficit into positive territory, as reported by Reuters on February 06th, 2017. The supply deficit is expected to be nullified in the upcoming 2017/18 crop year (October 2017-September 2018), according to analysts and industry experts, as last year’s rally in prices raises production expectations.

The global raw sugar market shifted to a deficit in 2016 after half a decade of surplus production. Brazil’s bumper crop may cap further gains in benchmark raw sugar prices on ICE Futures US, which were expected to be little changed at 21 cents per pound by the end of March 2017. However, industry associations say that raw sugar prices are expected to rise 1% from current levels to 21.25 cents per pound by the end of 2017.

The impressive rally in sugar prices since the start of 2016 reached 23.30 cents per pound in late September 2016, surging to a more than four-year peak near 24.00 cents in October 2016, but declining slowly but steadily since then. Sugar traded at 21.0 cents per pound on November 04th, 2016. The price was down 6.5% from October 04th, 2016, and was 40.4% higher on a year-to-date basis. The price was up 46.3% from November 04th, 2015. The sugar price rally reflects slowing production in key producers, causing a supply deficit in the sugar market. Prices in the Brazilian sugar market for sugar should remain high at 2017, supported mainly by estimates of the new global sugar deficit.

Brazil to dedicate higher cane crop for sugar

Millers in Brazil’s main center-south region will direct more than 47% of their cane crop to sugar output in the 2017/18 harvest, which begins in April 2017, the most since the 2012/13 season, according to cane industry data. Brazil’s millers can dedicate their sugarcane crop to either sugar or ethanol. Brazil’s center-south sugar production is estimated at more than 35 million tons (MT) in the upcoming 2017/18 crop year, surpassing the record reached in the harvest in the 2016/17 crop year.

The Brazilian sugar cane harvest is expected to play a major role in the determination of raw sugar prices in the upcoming 2017/18 crop year. According to Datagro, center-south sugar production in 2017/18 is predicted to increase to 36.1 MT to 36.5 MT from an estimated 34.1 MT this coming season. Some 600 MT of sugar cane are expected to be processed, much in line with the last season. However, the Brazilian sugar industry association Unica predicts a decline in the sugar cane harvest, even in good weather conditions, because producers have invested too little in recent years in maintaining and upgrading their plantations.

Despite the slight rebound projected in the global 2016/17 production, up from 3% over the previous season at 171 MT, the volume should not be enough to meet demand, which is estimated at 174 MT, according to the US Department of Agriculture. As a result, the deficit could reach 2.6 MT of sugar. According to the International Sugar Organization, this deficit could be even larger, reaching 6.2 MT.

White sugar prices to rally by end-2017

Gains in ICE white sugar prices are expected to be greater by the end of 2017. Industry estimates white sugar prices to rise 1% to $555 per ton by the end of March 2017, but up more than 10% to $605 by the end of 2017. However, traders say that the rise in prices would depend on the amount of sugar produced in the EU this year as government restrictions on production have been abolished. The lifting of quotas on EU sugar output could see the region’s imports decline and exports increase.

Along with the rise in white sugar prices, the market is expected to rebalance itself in 2017/18 from a deficit of 5 MT in the current crop year through the end of September 2017. However, this is contingent on production improvements in Europe, Thailand and India, and good all-round weather.

Sugar prices and the supply-demand scenario in the global market will also depend on the import needs of India, the world’s top consumer. Another will be the strength of the US dollar, which boosted Brazilian mills’ production of sugar by making the greenback-traded commodity more valuable in local currency terms in 2016.

Industry experts opine that rising sugar prices provides more incentive for sugar cane farmers to cultivate more crop. Even now, white sugar prices are up by a third over the start of 2015. Data from Unica, Brazil’s sugar industry association, shows that sugar cane output in the south-central region is up 3.7%, but sugar output is up 17%, signifying that most of the cane output has been channeled for sugar production and not ethanol. The share of sugar has risen to 46.8% to date, against 41.7% a year ago.

However, Thailand’s output is expected to be down by 5% in the current season, according to estimates made by the US Department of Agriculture. Higher realizations could lead to higher planting for the next crop season (2017/18) in major growing countries.

In India, another major cane grower and sugar producer, the Indian Sugar Mills Association (ISMA) said that sugar output until November 30th, 2016 was up by 17%, and mills started crushing early this season. Due to bad weather, India’s sugar output in the 2016/17 crop year is projected to be lower than the previous crop season. Even with the recent dip in prices, sugar mills, especially in the state of Uttar Pradesh, are expected to benefit from higher realizations. Although sugar imports attract a duty of 40%, giving ample protection to the domestic industry, a continued bearish trend in global sugar prices can be a dampener for the local industry.

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