|Global Market Analysis|
Improved supply and demand balance prospects may provide some support to prices
International sugar prices 6 followed a steady upward trend between May 2008 and August 2008, mostly in anticipation of a significant shortfall in the major producing countries of India and Brazil. But, since September, prices have been falling, as indications now suggest relatively better harvests in those countries than previously expected. The International Sugar Agreement (ISA) daily price for raw sugar, which reached US 12.07 cents per pound in May, increased to US 14.23 cents per pound in July and to US 14.61 cents per pound in August, before declining to US 13.53 cents per pound in September. For the first 9 months (January-September) of 2008, prices averaged US 13.09 cents per pound 7 , some 31 percent higher than the corresponding period in 2007. In 2008/09, sugar production is forecast to be lower than consumption for the first time since 2004/05, contributing to a reduction in stocks, which accumulated to record levels over the past two seasons. As a result, international sugar prices could start recovering later in the season.
Table 10. World production and consumption of sugar
* Jan-October 2008
World sugar output set to decline in 2008/09 as resources shift to other crops
FAO’s latest forecast for world sugar production in 2008/09 stands at 161 million tonnes, down 5.2 percent from 2007/08. The shortfall in production is attributed to a global decline in planted area, as many producers switched to alternative crops, such as maize and soybeans, led by expectations of better returns as a consequence of their high prices in early 2008. The largest contractions are expected in India, the European Union, and Pakistan, with smaller decreases foreseen in the United States, Australia, and the Russian Federation. While the decline in the European Union is mainly policy driven, namely through the implementation of the third phase of the quota-reduction scheme, in other cases, it reflects unfavourable growing conditions and/or reduced sugar plantings in favour of relatively more profitable crops. Overall, both developed and developing countries will be equally responsible for the decline in world output.
In the Latin America and Caribbean region, the production outlook in Brazil continues to be positive, with output expected at 33.2 million tonnes in 2008/09, corresponding to a 4.1 percent, or 1.3 million tonnes, increase over 2007/08 levels. However, heavy rains in April and May delayed harvesting operations and had a negative impact on yields, which are expected to be 1.6 percent below last’s year level. As a result, Brazil’s harvest season is likely to proceed through to December, a month later than normal. It is estimated that about 59 percent of Brazil’s 2008/09 sugarcane harvest will be processed into cane-based ethanol, buoyed by strong domestic demand. This compares with a 50 percent share back in 2006/07. Sugar production is also expected to rise in Argentina, reflecting a return to normal weather conditions, after last’s year coldest winter in 20 years that affected yields. The Government is going ahead with plans to expand the country’s ethanol industry, hence creating additional demand for sugarcane but also potentially hampering the growth in the non-energy sugar sector. Strong output is expected in Peru, as large investment entered the sector to cater for domestic consumption and the export market, while sugar output in Colombia should remain relatively unchanged from 2007/08, as an increasing share of the country’s cane harvest is diverted for ethanol production.
In Mexico, sugar production should reach 5.7 million tonnes, slightly lower than last season. The expected decline in output has been attributed to poor crop husbandry practices and a lack of fertilizer application. As such, production should be just enough to cover expected domestic consumption. While the determination of a reference price for sugarcane payments has always been a source of discord between growers and mills, the recent implementation of an ambitious plan to revamp the sugar sector should help towards building consensus and modernizing the country’s production systems. Sugar output is to expand also in Guatemala, the second largest sugar exporter in the region, as a result of increased plantings. Typically, area response in the country depends on administrated sugarcane prices and the relative profitability of alternative crops such as bananas and palm.
In Cuba, sugar output is officially forecast to increase to 1.8 million tonnes, which if realized would be 300 000 tonnes more than in 2007/08. This estimate might need to be revised downward in the course of the season, depending on the assessment of damages caused by hurricanes Ike and Gustave, which hit the country in September. Over the past two years, the sector has benefited from large investments following a period of downsizing which spanned from 2003 to 2005.
Aggregate sugar production in Africa is set to reach 11.1 million tonnes in 2008/09, 200 000 tonnes or 2 percent above the previous year. Output in the region has been on the rise for the past five years, at about 2 percent on average per annum. Expansion is largely attributed to strong domestic consumption, driven by growth in population, per capita income and government support. The prospect of gaining duty and quota-free access to the European Union market as of October 2009 under the Everything-But Arms Initiative, has enabled major expansion plans to be launched in many least developed African countries (LDCs). In addition, non-LDCs in Africa that belong to the African Caribbean Pacific (ACP) group are set to gain free access to the European Union after 2015, under the Economic Partnership Agreements (EPAs) of the European Union. The EPAs will replace the trade chapters of the 2000 Cotonou agreement, which has regulated sugar trade between both parties. These trade agreements are expected to boost the future growth in the sugar sector, especially for those least-cost producers. In South Africa, the largest sugar producer of the continent, sugar production is forecast at 2.6 million tonnes in 2008/09, up 5 percent from 2007/08, on account of good weather in the main growing areas resulting in better yield prospects. Growers must, however, deal with rising fertilizers costs, which have gone up by 100 percent on average since 2007/08. High input costs may threaten production in the future, especially if prices paid to growers do not adjust accordingly. The outlook for sugar production in Egypt is positive, where output should reach 1.9 million tonnes, 1.4 percent more than the last season. The country produces about two thirds of its sugar from sugarcane, while the balance is met from beet processing. The Government of Egypt has promoted the expansion of beet production which is more water efficient than cane. The area sown to beet reached about 68 000 hectares in 2007, but large investments in beet processing capacity were announced that should raise beet area and sugar production within the next two years. Production in the Sudan is estimated at 900 000 tonnes, up 3.5 percent from 2007/08, due to favourable weather conditions and conducive public support. There are plans to expand production to 10 million tonnes by 2015, with foreign direct investment from Gulf states. Expected gains are also foreseen in Kenya, where the major challenge facing the country’s sugar sector is the ability to compete with cost efficient sugar producers within the Common Market for Eastern and Southern Africa (COMESA). Production costs in Kenya are still considered among the highest in the continent and output may decline in the years following full liberalization of the market, scheduled after 2012, unless much needed reforms are implemented to upgrade the industry. Increases in sugar output are also forecast in 2008/09 for Mozambique (310 000 tonnes)and the United Republic of Tanzania (355 000 tonnes), where rehabilitation and expansion programmes are underway to take advantage of improved market access to the European Union. In Zimbabwe, sugar production is set to remain at about the same level as last season, but may be revised downward, as the industry is reported to face labour shortages in the cane growing areas.
The outlook for sugar production in Asia indicates a significant decline from the levels attained in 2007/08, due to sharp reductions in India and Pakistan. Sugar output in the former country is now expected to reach 24 million tonnes, corresponding to a 17 percent drop from last year, following irregular rainfall and a shift of land allocation in favour of grains and oilseeds. Overall production is now anticipated to fall short of expected consumption for the first time since 2004/05. This should contribute towards the reduction of stocks accumulated over the recent years and give support to domestic prices. In an effort to prevent production from dropping further next year, the Government has recently recommended that the statutory minimum price (SMP) for sugarcane be raised by 54 percent for the 2009/10 season. Similarly, sugar production in Pakistan is anticipated to decrease as drought conditions led to a reduction in planted area. In Thailand, early official estimates indicated that production may fall by as much as 5 percent in 2008/09, as many growers had reportedly switched to other crops such as cassava, whose demand as an energy feedstock by the country’s ethanol sector is expected to soar. However, favourable growing conditions could boost yield prospects resulting in a production outcome similar to last year’s level or slightly higher. In the rest of the region, an expansion is foreseen in Indonesia and Turkey, while production in China should hover around last year’s level despite the potential negative effect of a sudden cold weather spell that hit the southern sugar growing regions of the country.
In Europe, sugar output in the European Union is expected to contract to 14.4 million tonnes, after reaching 17.4 million tonnes in 2007/08. Under the reform of its sugar regime, which began in 2006/07, the European Union aims to cut sugar production by 6 million tonnes over the four years of the restructuring programme. For the 2008/09 season, producers sold back 3.3 million tonnes of quota sugar to the European Commission, after renouncing 0.71 million tonnes last year and 1.47 million tonnes in the first year of the reform. The Commission is on track to meeting the proposed reduction of sugar output without having to make compulsory quota cuts by 2010, as it had previously stated. Production is set to decline in the Russian Federation by 4 percent, as a result of a sharp drop in the area under beet. The industry will benefit once more this year from increased external protection, under a seasonal import tax of USD 220 per tonne, which spans 6 months beginning in December 2008. Sugar output is also expected to fall in Ukraine, where farmers cut the area sown to beet and turn instead to grains and sunflower seeds. In the rest of the world, sugar production in the United States is forecast below the 2007/08 level, following an 18 percent drop in sugar beet area, reflecting a shift to other crops. In Australia unfavourable weather conditions could depress output to 4.9 million tonnes, down 3 percent from 2007/08.
Developing countries behind the growth in sugar consumption
World sugar consumption in 2008/09 is forecast to rise to 163 million tonnes, which corresponds to a 2.2 percent increase over 2007/08. Consumption is estimated to exceed production by as much as 2.1 million tonnes, contributing to a reduction in global inventories that have overhung the market since 2005/06. The ratio of sugar stocks to consumption is now forecast at 47 percent, down from the high of 49 percent in 2007/08. The global expansion in consumption is being driven by rising per caput income in the developing countries, led by countries in Asia, Africa and in Latin America and the Caribbean. On average, per caput sugar availability is estimated to increase from 23.1 kg in 2007/08 to 23.4 kg in 2008/09. Current price relatives are also expected to induce some shifts away from HFCS (high fructose corn syrup) into sugar, given high maize prices. However, the latest downward trend in grain prices, if sustained, could contribute to some shift back to HFCS.
Sugar consumption in developing countries is foreseen to grow by 2.8 percent to 113.9 million tonnes, underpinned by increases in per caput income and population growth. Sugar consumption in India, the largest sugar consuming country in the world, is set to reach 25.5 million tonnes, up from 24.6 million in 2007/08, buoyed by relatively low prices and still strong economic growth. Also, year-on-year offtake is expected to increase in China, due to rising per caput income, strong demand from the food and beverages sectors, and high prices of alternative sweeteners. Sugar consumption is also forecast to rise in Brazil and Mexico where utilization is estimated at 12.0 million tonnes and 5.7 million tonnes, respectively. Consumption is forecast relatively unchanged in developed countries, notably in the European Union, Australia and Japan, given already high per caput usage, of nearly 36 kg per annum, and slowing population growth. Relatively higher growth is anticipated in the United States, reflecting greater use of sugar in food and beverage processing.
World import demand to increase
World sugar imports is forecast to fluctuate around 47.6 million tonnes in 2008/09 (October/September), 5 percent more than the 2007/08 estimate, driven largely by the need of those countries that face a production shortfall to import more. Much of the increase would be on account of the European Union, Indonesia, and Pakistan. The main feature of the trade outlook for 2008/09 is the prospect of the European Union turning into a net-sugar importer, as production declines in line with the reform of the domestic sugar industry. Official imports are now set at 4.9 million tonnes, 53.6 percent, or 1.7 million tonnes, more than last season. The question is how these imports would be sourced, considering the prohibitive import tariffs that exist and the limited possibility that EBA countries could export beyond their current capacity. Elsewhere in Europe, imports by the Russian Federation, the largest sugar importer in 2007/08, are expected to increase by 100 000 tonnes to 3.4 million tonnes, on account of lower production. Imports by the country have been less than in the previous year, owing to an exceptionally high import duty of USD 240 per tonne. In Asia, purchases by Indonesia, Pakistan, and Turkey are foreseen to increase, mainly on account of either strong domestic demand or a drop in production. Preliminary forecasts indicate that China may import about 400 000 tonnes, about 100 000 tonnes more than last season, which is significantly below what the country has purchased on average over the past 5 years, as production in the country continues to expand. In the rest of the world, deliveries to the United States are forecast at 2 million tonnes, a 3 percent increase over the previous year. Additional imports may be required in the course of the season to rebuild reserves, as the current stock level is relatively low. Imports by countries in Africa are foreseen to expand by around 1 percent to 9.3 million tonnes, much lower than previously envisaged, as locally produced supplies could deter imports.
As a result of shortages, exports by the major exporting countries are anticipated to decrease to some extent in 2008/09. However, given large global stocks, the decline should be limited to about 4 percent. Brazil, the world’s largest exporter, should be among those to benefit most from a generally tighter trade market. Indeed, the country could boost its shipments by 9 percent to 20.8 million tonnes, following a contraction in 2007/08. The drop in Brazilian sugar exports last year reflected storage competition in world markets, particularly after the return of India as a net-sugar exporter. Overall exports from Asiaare foreseen to fall by 21 percent to 10.6 million tonnes in 2008/09. The contraction is mostly due to an anticipated sharp decline in exports by India, from 2.7 million tonnes in 2007/08 to about 200 000 tonnes, stemming from an expected production shortfall. Reports indicated that India last yerar had gained market share in Asia at the expense of Brazil, owing to competitive pricing resulting from a cost-freight advantage. In line with the expected drop in output, sales from Thailand, mostly routed to neighbouring importing countries, could decline by 7 percent to about 4.6 million tonnes. For the major exporters, the prospect of improved import demand could lead to some reduction in the large stocks of sugar carried over in 2008/09.
6. International sugar prices are based on the International Sugar Agreement (ISA), produced by the International Sugar Organization (ISO), and computed as a simple average of the close quotes for the first three future positions of the Intercontinental Exchange Sugar Contract No. 11.
7. US 288.6 dollar per tonne.
8. Sugar production figures refer to centrifugal sugar derived from sugar cane or beet, expressed in raw equivalents. Data relate to the October/September season.
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