|No.1 June 2006|
|Global Market Analysis|
World sugar prices have increased significantly since FAO’s preliminary forecast in December 2005 for October 2005/September 2006, largely due to a substantial rise in crude oil prices, as well as a world supply deficit for the third consecutive year. EU sugar policy reforms are expected to reduce world exports by about 5 million tonnes and further contribute to strengthening prices. The International Sugar Agreement (ISA) daily price rose from an average US¢11.38 per pound in November 2005 to an average US¢17.24 per pound in March and reached a 25-year high of US¢19.25 per pound on 3 February. Between January and March 2006 sugar prices averaged US¢16.98 per pound, which was 91 percent higher than the same period in 2005.
Looking ahead, world sugar prices should remain firm and stable around their current levels as the supply and demand fundamentals in the world sugar market do not point to prices strengthening further, barring extreme weather events or a continuing rise in crude oil prices. At the New York Board of Trade, the October 2006 Sugar No.11 futures contract averaged US¢17.66 per pound in April 2006.
FAO has revised upward the production shortfall for 2005/06 reflecting lower than anticipated sugar production in Brazil and the Far East, against better than expected output in the EU and producing countries in Eastern Europe. The revised forecast for 2005/06 indicates world sugar production at 149.7 million tonnes, a 3 percent increase over 2004/05, while world consumption is forecast at 149.9 million tonnes. Developing countries will account for the bulk of the growth in global output, where aggregated production is estimated to reach 106.9 million tonnes, led by a recovery in India.
Among developing countries in Latin America and the Caribbean, production in Brazil is forecast to reach 30 million tonnes, relatively unchanged from 2004/05 levels, but lower than expected, mainly due to unfavourable weather, particularly in the north-northeastregion where cane output is estimated to be 20 percent less than in 2004/05. Preliminary forecasts for Brazil indicate the cane harvest will likely grow by 8 percent to about 420 million tonnes in 2006/07, partly driven by higher yields and increased processing capacity as 25 new mills in the centre-south will start crushing cane for the 2006/07 season. In addition to weather related uncertainties, sugar production in Brazil will depend on how the expected large cane harvest is split between sugar and ethanol. Early reports indicate that slightly more than 50 percent of the cane harvested will be diverted to ethanol production in order to meet domestic and export demand. Retail prices of ethanol have been rising since January 2006 and are currently at about 73 percent of the local gasoline prices. At this price level gasoline has a comparative advantage over ethanol as it is a more efficient fuel.
Sugar output in Mexico, is expected to decline in 2005/06 to 5.8 million tonnes from a record 6.1 million tonnes in 2004/05. The reduced output is partly due to flood damage from Hurricane Stan in October 2005 and drought conditions in other growing areas. The sugar policy reforms recently adopted have caused uncertainties within the industry and tension between growers and millers. In addition, a WTO panel ruled against the appeal by Mexico in March 2006 for a 20 percent tax on high-fructose corn syrup (HFCS) usage. Plans to diversify into bioethanol have been adopted as part of an ambitious project to improve the competitiveness of the sector in anticipation of the liberalization of the market under NAFTA in 2008.
Sugar production in Cuba is expected to remain relatively unchanged in 2005/06 at 1.4 million tonnes, as harvest delays will affect cane quality and hence the sugar recovery rates. Further downsizing of the industry has been halted as world sugar prices continue to remain strong, and several mills will reopen in 2007. However, the lack of investment in the sector over the past three years means that soaring operating costs may offset the gains from higher prices.
In contrast, sugar production in Guatemala is estimated to reach 2 million tonnes in 2005/06, a decline of 8 percent from 2004/05. The fall reflects the damage caused by Hurricane Stan to the growing areas along the Pacific coast, where cane yields are reportedly 4 tonnes per hectare below the record 91 tonnes per hectare harvested in 2004/05.
In Africa, sugar production has been revised upwards to 5.6 million tonnes in 2005/06, reflecting expected increases in Mozambique, Swaziland and Zimbabwe in Ethiopia and the United Republic of Tanzania. Sugar production in Mozambique has risen rapidly from 39 000 tonnes in 1998 to about 240 000 tonnes in 2005/06, largely due to improved productivity at both the farm and mill levels through a rehabilitation programme implemented by the subsector in 2000. In Swaziland and Zimbabwe sugar output is expected to increase 625 000 tonnes and 478 000 tonnes, respectively, while in Ethiopia and the United Republic of Tanzania, production is forecast to reach 300 000 tonnes and 280 000 tonnes, respectively. A factor contributing to these expansions has been the expected gains anticipated by the Least Developed Countries (LDCs) from the EU Everything but Arms (EBA) Initiative allowing unlimited and free of duty market access to LDC sugar exports from 2009/10.
Over the medium term, however, the ability of these countries to increase their presence in the EU market is likely to be limited, due to the investment required to expand production, as well as the effects of natural trade costs and expected price reductions from July 2006 as part of the EU sugar policy reform. In contrast, sugar output in Mauritius is forecast to decline by 9 percent to 580 000 tonnes in 2005/06 as adverse weather conditions resulted in a smaller area harvested and lower yields. The Government has announced a series of measures to cope with EU sugar regime changes. The policy changes in the EU will essentially reduce export prices by 36 percent over four years for ACP country shipments under the Sugar Protocol. These measures range from converting sugar plantation to residential land and the conversion of sugar into ethanol and rum.
Estimates for developing countries in Asia indicate a sugar output of 43.4 million tonnes, considerably higher than in 2004/05, largely reflecting the recovery in India. Production in India fell from a high of 20 million tonnes in 2002/03 to 13.9 million in 2004/05 reducing stock levels from 11.2 million tonnes to 5.4 million tonnes in the corresponding period. However, sugar output in 2005/06 is forecast to reach 19 million tonnes, 46 percent more than in 2004/05, as higher domestic prices prompted a substantial increase in plantings. The 2005 monsoons provided ample rainfall in the principal cane growing areas of Karnataka, Gujarat and Uttar Pradesh, where output is estimated to have reached 6.5 million tonnes. To date, in 2005/06 (October/September), India has imported about 500 000 tonnes of raw sugar to meet domestic consumption and stock formation, down from 1.9 million tonnes in 2004/05, but higher than 231 000 tonnes in 2003/04. Assuming a normal 2006 monsoon, it is likely that India will reduce its imports for the 2006/07 cycle. Production in Indonesia is expected to be relatively unchanged at 2.3 million tonnes in 2005/06, while output in the Philippines is estimated to decline by 4 percent to 2.2 million tonnes.
Output in China is revised downward to 10 million tonnes compared with 2004/05, reflecting lower than expected production in Hainan, one of the largest sugar growing provinces. The contraction is expected to foster a domestic price increase and force the Government to auction off some of the state’s reserve sugar. In Thailand, sugar output is now forecast at 4.8 million tonnes, a decrease of about 11 percent from 2004/05, as a result of consecutive droughts. In light of rising international sugar prices and smuggling to neighbouring countries, the Government has raised the price of white sugar at the factory by 27 percent for the first time in more than two decades. In addition, Quota A sugar, which is the annual sugar output allocated for domestic sugar, was increased by 200 000 tonnes to meet strong domestic consumption. These measures will also stimulate cane growing as many farmers cut back on sugar area in favour of higher-priced cassava.
Sugar production in developed countries is expected to decrease by 1.2 percent in 2005/06, reaching 42.8 million tonnes. The major reasons for the decline are EU policy reforms which have led to a significant reduction in output and the envisaged decrease in North American production. The decline expected from these two major producing zones would more than offset the growth expected in the Russian Federation and South Africa following significantly improved world prices.
The reform of the Common Market Organization (CMO) for sugar will substantially reduce domestic support to EU sugar growers from July 2006. The intervention price will be reduced by 36 percent over four years, the A and B quotas will be merged and the C quota eliminated. The A and B quotas are production quotas assigned to EU sugar producing states. The difference between A and B quotas relate to the amount of production levies. Sugar produced above A and B quotas are C quotas and must be exported outside the EU. Given this background, a reduction in output was expected as growers adjust to the reforms. However, recent favourable weather conditions have resulted in better yield expectations and forced an upward revision of production estimates for 2005/06. Production is now expected to contract to 21.3 million tonnes in 2005/06 from 22.1 million tonnes in 2004/05. This reduction will mostly occur in Germany, Greece, Italy and the Netherlands. Despite the reduced output, stocks are expected to increase because exports are subject to a 1.273 million tonne ceiling under the WTO panel ruling in 2005. Hence, the issuing of export licences ceased as of 22 May 2006, as required by the WTO, but actual shipments based on export licences issued prior to that date will be allowed for three months, until 22 August.
As a result, a significant contraction in EU sugar output is expected in 2006/07, as the impact of the reforms takes hold. A number of processing plants throughout the EU have announced that they will stop operating from 2006/07. Of the 19 factories currently in Italy, only six will remain, and in Poland nine factories will stop operating. In France, a 7 percent reduction in planting is predicted resulting in a production forecast of some 12 percent below the last five years’ average. In Greece and Italy heavy rains exacerbated the situation during planting. Recent estimates for Italy indicate that production in 2006/07 may be a third less than the quantity expected in 2005/06.
A decrease in production of about 350 000 tonnes is forecast for the United States in 2005/06, despite favourable prices, largely due to hurricane damage in Florida and Louisiana in 2005, particularly Hurricane Katrina. About 2 023 hectares (5 000 acres) of cane area were affected reducing output by as much as 2 million tonnes and causing a shortfall in supplies to processing plants. Prospects for a smaller harvest resulted in a 500 000 tonnes increase in the Tariff Rate Quota (TRQ) import.
In contrast, production is forecast to increase in the Russian Federation by about 270 000 tonnes, following technical improvements at both the farm and factory levels. Output in 2005/06 is estimated to reach 2.7 million tonnes. High world prices are also expected to increase production in South Africa, by over 300 000 tonnes in 2005/06 to reach 2.5 million tonnes. However, in Australia excessive rain in Queensland has lowered the forecast of sugar yields, limiting the expansion in output to less than 1 percent, or 40 000 tonnes.
Table 8. World production and consumption of sugar (million tonnes, raw value)
The FAO forecast of world sugar consumption in 2005/06 is 149.9 million tonnes, a 1.9 percent growth from the 147.2 million tonnes in 2004/05, but below the annual consumption growth rate of 2.5 percent averaged over the last ten years. The slow down is largely due to higher sugar prices which have negatively impacted on the demand from LDCs. However, developing countries largely account for the continued consumption growth, particularly in China and India where the significant expansion in demand has been underpinned by strong economic performances. In developed countries, per capita consumption has been declining over the last decade, reflecting health concerns associated with high sugar consumption. Overall consumption in developing countries in 2005/06 is expected to grow by 2.6 percent compared with a 0.4 percent growth rate estimated for developed countries.
On a regional basis, more than 50 percent of the increase in sugar consumption in 2005/06 is expected in the Far East, particularly in the more populous countries of China and India, where consumption is expected to expand by 3.1 percent to 13.4 million tonnes and 2.6 percent to 20.7 million tonnes, respectively.
In Latin America and the Caribbean, the second largest consuming region in the world, consumption is expected to reach 27.1 million tonnes, mainly supported by consumption in Brazil, which is estimated at 11.1 million tonnes in 2005/06.
Above average growth rates are also expected in the Near East and Africa, where sugar utilization is estimated by FAO at 11.5 million tonnes and 8.3 million tonnes, respectively.
The consumption pattern in developed countries is expected to continue in 2005/06, as total consumption remains relatively stagnant and per capita levels decline, due to low population growth and dietary concerns. Total consumption is expected to increase marginally from 47.7 to 47.9 million tonnes in 2005/06, with the two main consumers, the EU and the United States, expected to utilize 18.1 and 9.1 million tonnes of sugar, respectively, representing no change from the previous year. The Russian Federation, a key sugar consuming and importing country, is also not expected to show significant changes in its consumption levels, although higher world prices should support higher domestic production and consequently, a reduced dependence on imports.
|GIEWS||global information and early warning system on food and agriculture|