Agri Commodities Outlook for 2018: Part 2 – Sugar
This episode is sponsored by De Smet Engineering & Contracting, and was recorded on February 1, 2018.
Be sure to download the new and expanded IEG Vu Global Outlook 2018.
Hello, and welcome to the Down To Agribusiness podcast. I’m Sandra Boga, senior news analyst for IEG Vu. A recovery in global sugar outputs that set in last year is likely to accelerate this coming season. I’m joined by senior commodity analyst for F.O. Licht, Stefan Uhlenbrock, who is here to outline the latest data for IEG Vu’s sister title.
Hello, Stefan. Firstly, can we talk about prices? Now, world prices fell quite sharply over 2017 by around 20% overall. Does 2018 hold the same fate for prices?
Indeed. A number of raw sugar futures dipped from an intro year high of 21.49 cents per pound at the beginning of 2017 to a sixteen month low of twelve-and-a-half cents in late June, since when prices have seesawed between thirteen and fifteen cents. As we speak, prices are trading close to the lower level of that band as it emerged last month that the market may now be facing the prospect of Indian exports already in the 2017/18 season due to higher than expected output there.
However, in November raw sugar futures in New York did rise to a five-and-a-half month high of 15.28 cents per pound, with whites breaching the US$400 a tonne threshold as the significant switch to ethanol production in Brazil to sugar provided support. Given that this preference is likely to extend into 2018/19, Brazil’s mills seem currently headed for a significant drop in sugar production next season which, dependent on the extent of the reduction, may reduce the 2017/18 surplus. So although a strong rise in global output has pressured prices in recent months, the prospect of a significant drop in Brazil’s sugar production is on the horizon. This has allowed the market to put in a bottom, but a sustained rise in values seems rather unlikely.
So you projected a surge in global sugar output for 2017/18. Could you give us an indication of F.O. Licht’s latest data?
Yes. The increase in global production will be sufficient to turn the world market back into surplus after two consecutive years of deficit this season. We estimate the total global output in 2017/18 will rise by 14.6 million tonnes to a total of 192.5 million tonnes, with the world sugar surplus now projected at 3.9 million tonnes compared to a deficit of 2.4 million tonnes in 2016/17. If realised, world sugar output during 2017/18 would be a massive 23.6 million tonnes higher than just two years ago, when output dropped to five year low. This just reflects how quickly global sugar product can recover in the wake of high prices amid good weather.
You say there will be a drop in Brazilian output. Where is this increase in global output going to come from?
Well, sugar production in the European Union and top producers in Asia, such as India and Thailand, is rising strongly this season due to expanded acreage and very good yields.
This may offset the likely drop in Brazil in 2018/19 to around 38.7 million tonnes from an estimated 40.4 million this season. Total Asian cane sugar production is seen rising to 69.4 million tonnes in 2017/18, from just 60.7 million a year ago which had been the lowest level in seven years. For the EU, we now project the white sugar output to rise to a 19.2 million tonnes in white value terms, without the sugar equivalent of ethanol production in the new season, which is 3.3 million tonnes more than last year. Good growing conditions with the right mix of rainfall and sunshine in most of the big producing countries have set the stage for a big bounce in sugar output there, while area under cultivation has risen by about 16%. This is being complemented by rather high sugar yields per hectare, which will be significantly above the five year average in several countries.
So, while we’re speaking of the EU, the end of sugar quotas last September is another important part in the puzzle.
Yes. The abolition of the sugar production quotas in the European Union will certainly lift output there and, as a result, exports to the world market may more than double to about three-and-a-half million tonnes this season from 1.4 million a year ago. The most significant increases in availability will occur in France and Germany, but there will also be sizeable increases in countries such as The Netherlands, Belgium and the United Kingdom.
Though exports from the EU will not be kept by the WTO limit anymore, not all of this additional sugar will enter the world market. The surplus producers in the European Union are competing for market share in the deficit countries of the Union, which for example has pushed prices in Italy down to 360 to 370 Euros per tonne on a delivery basis. So the increased availability of EU beet sugar will partly crowd out cane sugar that was previously imported into the EU. In fact, exports to the world market are not profitable for EU producers, at No. 11 raw sugar prices of thirteen or fourteen cents per pound, but EU producers may still decide to clear the deck and sell most of the additional output this season as another big crop is on the horizon for 2018/19.
What about other key producing countries outside of the EU but within Europe?
Well, the main point to mention here is, of course, Russia. Russia’s sugar beet harvest ended in December with the beet campaign expected to last until about the end of February or early March. The beet yield in Russia fell about 7% this season, to 43.6 tonnes per hectare, but on the other hand sugar extraction rate is up nearly one percentage point, which is an extremely huge year over year increase. All in all, the larger beet area coupled with the significantly higher sugar extraction rate more than offset the lower beet yield this season, lifting beet sugar output in Russia to a record of between 6.4 and 6.5 million tonnes in (? 07.59) terms, which is about three tonnes more than last year’s record output. All in all, Russia remains the world’s largest beet sugar producer in the current season.
Going back to key global producer in sugar cane, Brazil. Could you give us more insight into next year’s cane crush?
Well, the 2018 cane crush is likely to be more heavily weighted towards ethanol as the countries new gasoline price policy, where the gasoline price is adjusted in relation to international crude oil prices, makes ethanol production more interesting at times of crude oil at around $60-70 per barrel.
It is also worth noting that Brazil’s president signed the RenovaBio legislation into law in late 2017, which will lead to sharp increases in the use of biofuels such as ethanol and biodiesel in the country in coming years as a way to help cut carbon emissions. Specifically, the programme includes a minimum blending target for anhydrous fuel ethanol, due to reach 30% by 2022 and 40% by 2030. Currently the maximum allowed is 27%. This means that the ethanol industry expects the programme to double demand for ethanol in the country over the next ten years, but the programme does not expect it to have a short term impact on sugar and ethanol production in the next 2018/19 crush.
Finally, overall is there a potential for next year’s global sugar surplus to be even larger than projected?
The surplus projections for the new season by different analysts have led to downward pressure on global values in recent months. In fact, the surplus could even get bigger if consumption in India and China does not recover as strongly as we currently assume. It is especially the white sugar market that has experienced the sharpest pressure on prices. In fact, the white sugar premium has collapsed from levels of as much of $115 a tonne in April to as little as $45 in mid-September, which was the lowest level since February 2011.
While this key measurement for refining profitability has recovered somewhat to $60 a tonne, there does not seem to be much more potential to the upside. This is due to ample white sugar export availability from all important producers including the European Union, Ukraine, Russia, Thailand, with the recent approval of heavy export subsidies in Pakistan getting even more supply to the global market. This happens at a time when India’s import needs have disappeared and the country could also already become a net exporter this season. So it is telling that even the expected strong drop in sugar production in Brazil in 2018 does not seem to be sufficient to avoid a surplus in the current season.
Okay. Thank you, Stefan.
Download the new and expanded IEG Vu Global Outlook 2018 which is a comprehensive report where expert analysts cast their eyes back on the preceding 12 months and try to make some informed and accurate predictions for 2018 across multiple processed food commodity markets.
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