Last year, sugar was the worst performing of the soft commodities, with New York-traded raw sugar futures falling by 22% and London white sugar dropping by over 31%, amidst the return of global surplus. 2016 has become a distant memory when sugar was the best performing soft commodity. Green Pool Commodities in its latest forecast says the global surplus is likely to be 10.4 million metric tonnes in 2017-18. While sugar is produced in some 120 countries with around third of it traded, it is the probable impact on price movement by both major producers and importers, along with policy impacts shifting output (in EU in particular) and confounded lately by stress on consumption by widespread anti-sugar campaigns by health advocates that will doubtless have say on price development over the course of 2018.
Of course, the joker in the pack will continue to be the weather. The return of normal rains, particularly in Asia is helping drive global output this year. Nonetheless, with meteorologists pointing out that 2017 was the warmest non-El Niño year on record globally, impacted by human-caused greenhouse gas emissions, few will discount extreme weather awaiting 2018.
Analysts across the trading and investment houses have put on their forecast spectacles to offer their nuanced take on the year ahead. There is a widespread consensus that sugar price will hover gently on either side of 14-15 cents/lb. This includes ABN Amro, Commerzbank, Goldman Sachs, Rabobank and Societe Generale.
With the Brazilian government legislating the new national biofuels policy RenovaBio which aims to increase energy security via expanding the production of biofuels, along with petrol prices in the country rising by 20% since July ’17, driving demand from flexi-fuel vehicle owners, there is little doubt that more cane will be diverted to fuel ethanol production. Analysts at Citi bank expects “the sugar mix in Centre South Brazil to fall to 44% next year, with downside risks should current sugar/ethanol spreads persist, which could mean a nearly 3 million tonne, tel quel, decrease year on year in raws output.” The global bank ING concurs “if stronger oil prices remain, and domestic ethanol trades at a premium to sugar, the ethanol balance sheet should absorb a significant portion of sucrose from the sugar balance sheet”.
Rabobank noted in its second quarterly report in 2015, that, with current price levels well “below the cost of production for the majority of producers in the world”, it is the cushioning effect and impact “in many key producing countries” by “government intervention” whether through export subsidies, or variety of other support measures, that “has prevented the transmission of world market price signals to producers” which would have served to control output. This continues to be the case today. In the relatively protected markets of EU, Pakistan, China and India, sugar output is expected to increase. The Indian Sugar Mills Association recently revised the 2017/18 forecast at 26.1 million tonnes (compared with 20.3 mln tonnes in the previous year). Pakistan is set to reach a new milestone of 8 mln tonnes while EU is set to produce 20.2 mln tonnes (up from 16.8 mln t last year). “Stellar domestic prices in China” is likely to drive output through to 2018-19.
The bank Societe Generale points out that even though global stock-to-use ratio is expected to decline from 22% in 2016-17 to 2017-18, “primarily due to drawdown of inventories in India, China and the EU”, this is unlikely to stimulate a bullish response from prospect “increased imports” as “expectations of a recovery in production in 2017-18” will negate this. Alas, therefore, “lack of import demand from these major sugar-consuming regions should keep the export markets fairly well supplied” and the global industry will have to contend with another year of low prices.
My take on the price development towards the end of 2018 is that it is likely to be lower (10-12 cents/lb) than the consensus view. With cane productivity improving across the sector along with sugar recoveries, the output will continue to outstrip demand by a fair margin.