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This is a transcript of this special episode of the Down to Agribusiness podcast. Visit the show page here.


World Sugar Balance: The Data Behind the Surplus
This episode was recorded on April 20 2018

Sandra Boga

Hello and welcome to the Down to Agribusiness Podcast - I'm Sandra Boga, Senior News Analyst for IEG VU. The global sugar market is geared for another surplus this 2017/18 season with another one looming in 2018/19. Today, I'm joined by Senior Commodity Analyst, Stefan Uhlenbrock, who will be outlining the latest F.O. Licht data and discussing the outlook for the year ahead.

Hello Stefan, firstly can we talk about why global sugar is set for a surplus this season and next?

Stefan Uhlenbrock
Eight of the world’s ten largest producers are producing more sugar this season than in 2016/17, mainly a result of larger planting areas in response to the high prices in 2016 and better weather. The strongest increases are being seen in India, Thailand and the European Union. While the campaign in the EU is already over with 3.5 mln tonnes more sugar produced, the estimates for India and Thailand have gotten bigger and bigger in recent weeks. Thailand's sugar production in 2017/18 is currently estimated at 14.0 million tonnes, up sharply from 10.0 mln a year ago, while India’s is set to rise by 12 mln tonnes to 32.0 mln, with a further increase to 33 mln tonnes assumed for 2018/19.

In our latest sugar balance, this season's global surplus is nearly 8 mln tonnes; not only the first surplus after two years of severe deficits but at the same time a massive one and the biggest since 2012/13. What's more, it may be followed by another surplus of 5.0 mln tonnes in 2018/19.

Sandra
Where are the notable decreases and increases in sugar production globally?

Stefan
Well, the sharpest decrease in output for 2018/19 is seen in Europe where sugar production is projected to fall by nearly 2 mln tonnes on the year to 33.0 mln (raw value). This drop is related to a return to trend yields in the European Union from the excellent results in the past campaign, while area under cultivation is seen hardly changed. Russia and Ukraine are also likely to produce less sugar than this season due to a decrease in area under cultivation.

Brazil’s sugar production is likely to be rather unchanged on an Oct/Sep basis in 2018/19 as the strong drop in sugar production in the 2018 crush, which is currently getting underway, mainly falls into the 2017/18 sugar balance year. Among the main assumptions for Brazil is that the 2018 Centre/South cane crush will fall to about 590 mln tonnes from 596 mln this season, with the sugar allocation to fall by five percentage points to just 41.5%. This, together with a significantly lower ATR level of just 134 kg per tonne, may lead to the production of about 31.3 mln tonnes of sugar, tel quel, in the new season, down from 36.1 mln in 2017/18.

Sandra
Now onto the demand side, what will shape this globally in 2018/19?

Stefan
Well, the sharpest decrease in output for 2018/19 is seen in Europe where sugar production is projected to fall by nearly 2 mln tonnes on the year to 33.0 mln (raw value). This drop is related to a return to trend yields in the European Union from the excellent results in the past campaign, while area under cultivation is seen hardly changed. Russia and Ukraine are also likely to produce less sugar than this season due to a decrease in area under cultivation.

Brazil’s sugar production is likely to be rather unchanged on an Oct/Sep basis in 2018/19 as the strong drop in sugar production in the 2018 crush, which is currently getting underway, mainly falls into the 2017/18 sugar balance year. Among the main assumptions for Brazil is that the 2018 Centre/South cane crush will fall to about 590 mln tonnes from 596 mln this season, with the sugar allocation to fall by five percentage points to just 41.5%. This, together with a significantly lower ATR level of just 134 kg per tonne, may lead to the production of about 31.3 mln tonnes of sugar, tel quel, in the new season, down from 36.1 mln in 2017/18.

Sandra
Now onto the demand side, what will shape this globally in 2018/19?

Stefan
Global sugar consumption is estimated to show only modest growth of around 1.6% in 2018/19 and could reach 186.6 mln tonnes. This would be up around 3.0 mln tonnes from last year.

We have scaled back this year's growth from 2.0% previously as very low imports suggest that Chinese sugar consumption has been curtailed more than was assumed so far by cheap corn sweeteners. So we assume Chinese sugar consumption to be no higher than 17.0 mln tonnes (raw value) in the current season, down from a previous estimate of 17.5 mln. Our assumption for 2018/19 is a modest rise to 17.2 mln tonnes due to ongoing growth in the food and beverage sector.

India's sugar consumption is meanwhile seen rising by half a million tonnes to 25.0 mln (white value) in 2018/19. However, the estimate for India may have some potential for an upward revision as domestic sugar prices have collapsed in recent months against the background of the strong rise in domestic production. Given that the price elasticity of sugar demand in a developing country such as India is much higher than in industrialised countries like Japan, the US or Germany, it may be reasonable to assume that consumption could be supported by this.

Sandra
What about sugars ongoing demonization? Is this likely to continue?

Stefan
Yes, sugar continues to come under attack for its supposed adverse effects on human health. A tax on sugar-sweetened soft drinks went into effect earlier this month in the UK, with a similar measure due to follow in neighbouring Ireland at the beginning of May. Similar taxes already exist in countries such as Mexico, Chile, Egypt and in major metropolitan areas in the US. Given the extent of the taxes it seems safe to assume that they may ultimately have an effect on consumption of these beverages. This would even more so be the case if developing countries such as India and Thailand should jump on the bandwagon of introducing such taxes because the rather high price elasticity of demand in these countries.

More importantly, food and beverage producers are proactively reducing the amount of sugar in their products and replace them with artificial sweeteners to avoid the aforementioned taxes. They are also decreasing portion sizes and diversify their corporate portfolios. So this may ultimately have the larger effect on sugar consumption than the reduction of soft drinks consumption itself.

Sandra
And what are the likely levels of exportable sugar production for this season and next?

Stefan
As Thailand's and India's crops get bigger and bigger, world exportable production is estimated to surge to an all-time high of 63.5 mln tonnes in 2017/18, which would be up from 57.9 mln a year earlier.

Exportable production in Asia is seen doubling to 19.3 mln tonnes in 2017/18 from 9.2 mln a year ago mainly due to the expected increase in output in Thailand and India. Increased availability from the EU is also a key contributor to this development. Though down a bit year-on-year, supplies available for export are expected to remain heavy in 2018/19.

In addition, since exports from the EU are not capped by the WTO limit anymore, the bloc's exporters have been active to offload their heavy surpluses since the start of the new season despite non-remunerative export prices. In fact, the EU's exports onto the world market reached 1.7 mln tonnes in the October/February period of this season alone, up sharply from 0.5 in the same period last year. This may occur in the hope that sugar that has been shipped abroad does not pressure domestic prices anymore, which are still of bigger importance than exports.

Sandra
So, in conclusion what would your general outlook for the 2018/19 be? Bullish or bearish?

Stefan
If the current forecast for another huge surplus in 2018/19 proves to be true, this would mean that the world market may be facing bearish pressure for the foreseeable future. It also means that it would be rather unlikely that the market has already seen its lows.

One may argue that India's huge surplus is unlikely to enter the world market unless the government approves subsidies. That is true, but we expect that the government will approve additional export measures in coming weeks.

The reason for this expectation is that millers are currently not able to pay farmers for their cane deliveries due to collapsing domestic prices and this is angering farmers. On the other hand, general elections are due to be held in India in April or May 2019 while the ruling BJP party is reportedly considering to go for early polls by the end of 2018. Further, Maharashtra is heading towards state elections in 2019 and Karnataka already goes to the polls next month. Given that (cane) farmers form an important part of the electorate it seems unimaginable that the government will not come to the rescue of the farmers (and mills) to improve the cash flow of the mills. Supplies available in the global market may therefore continue to rising further down the road.

All in all, it is currently impossible to construe a bullish story. It is telling that even the strongest imaginable decrease in Brazil’s CS sugar production would not be enough to avoid a global surplus in 2017/18. That could mean worse is yet to come for sellers.

Sandra
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