It goes without saying that the pandemic has been disruptive. However, sugar production in the southern hemisphere has proved resilient in the face of these difficulties, thanks to large scale mechanisation. Thailand and India, which are more dependent on migrant labour may find the season underway both more challenging and expensive. Deficit countries have increased their imports to ensure the security of supply, however, consumption remains sub-optimum whilst lockdowns and other restrictions remain. The arrival of vaccines will probably take another year or so to filter through and reset some semblance of pre-Covid normality. This means that consumption will grow not as a V curve, but as an S.
For the industry in general, and companies in particular, lessons learned from, with a shift of emphasis from producers to end-users as price regulators. This has created a new paradigm for the industry, and in order to remain competitive, the industry needs to respond to this evolution.
At the outset, there is a need to reengineer the value chain. Scientific and technological advances are proffering significant diversification opportunities. Progressive companies not only just produce sugar but secure revenue streams from a range of products. British Sugar monetises waste streams profitably, (e.g. selling Limex to farmers – a soil conditioner which is a precipitate from beet juice purification process). Cosun exploits biotechnological advances to produce resins from beet pulp for a range of end uses including paints. Cosan has tipped its toes in Brazil’s booming fintech (financial technology) scene.
There are three sector segments which would benefit from a root and branch overhaul. These are the sugar companies themselves, the repurposing of commodity markets, and the direction of government support to the industry.
Companies need to think about the value they can add to margins through cross-selling as an integrated solution provider. Most efficient and well managed companies today are highly adept at extracting full value from cane and beet. They are less sophisticated as sellers. The industry adage has always primarily been volume over value. Selling is mainly done in a very binary format; sugar seller to sugar buyer. Instead, there should be a broad cross-selling approach as suppliers not only of sugar but also, as examples, alcohol gel, carbon credits, bioethanol for vehicle fleets and supplying raw material for packaging through investment in new sustainable products either through direct investment or tolling agreements. This is how financial institutions make money. They too have what could be deemed a commoditised product, money. Profits in banking are not earned through operating a current account, but by selling other products.
Investments in related industries also need to be targeted. It is noteworthy that start-up companies creating sustainable packaging have, as investors, multinational food companies. Sugar companies need to invest in similar start-ups to develop downstream opportunities rather than simply attempting to do this in-house.
Commodity markets also need to consider if they are in tune with the market and how regionalisation is becoming a stronger theme than globalisation.
Thirty years ago, the market consisted of a few major end-users, many of which were parastatal, and a range of medium-scale producers. Today, consumers are fragmented, and production is concentrated in the hands of a few large producers, leading greatly to market distortion, sometimes on an epic scale. Futures pricing needs to be reoriented to be more relevant and to augment price discovery.
There is also a trend emerging in the development of regional commodity exchanges, such as the Dubai DMCC market, and recently announced the Egyptian commodity market that includes sugar. Markets such as the Zhengzhou futures market in China will increasingly become mainstream in determining value. Al Khaleej group is a major supporter of the Dubai initiative. Producers, end-users and traders should examine the best ways to make regional markets reflect their supply and demand situations as a means of enabling better price discovery and avoiding basis risk.
As companies increasingly are moving towards a bio-refinery model, the way value is determined needs to be restructured as sugar is just one of the products they produce. Therefore, price discovery should be more accurately based on a composite of the carbohydrate, chemical and energy markets
In order for efficient industries to thrive, they need to redirect government policies on subsidies. Currently, the point where subsidies are provided is at the wrong end of the value chain. A subsidy should be seen as a catalyst, not a life support system. Governments should be enablers of innovation, resilience, and sustainability. The New Zealand dairy industry phased out subsides 35 years ago. It resulted in investment in the industry and astute marketing to create a world class industry. Similarly, increased mechanisation and better water resource management could be achieved in the sugar industry.
As we slowly enter the new normal, sugar companies and industries will have to both adapt and respond to new challenges. Not that they have a choice. As N.R. Narayana Murthy aptly points out «Growth is painful. Change is painful. But nothing is as painful as staying stuck somewhere you don’t belong».
Senior Strategy and Investment Officer, Soft Commodity Consulting