Global sugar takes a break from price rally

07.12.2016

While local market conditions continue to favour sugar producers, a continued deceleration in global sugar prices can pose a risk.

A downtrend in global sugar prices is something domestic investors in sugar shares need to keep a watch on. While local market conditions continue to favour sugar producers, a continued deceleration in global sugar prices can pose a risk. Raw sugar prices (the ICE #11 contract) have fallen by 12.4% over a month ago and are down by 16.1% from the start of the current quarter. White sugar prices have fallen too, but to a lesser extent. Domestic sugar prices are doing much better in contrast, with wholesale rates of white sugar down by only 3.5% over a month ago.

What ails global sugar prices? Fund selling of sugar contracts due to breaches of technical levels, a fall in the Brazilian real and fears of abundant supply in the next season were factors, according to a 2 December Reuters report. Generally speaking too, commodity prices of softs have eased upon the strengthening of the dollar. A decline in Brazil’s currency versus the dollar (down 8.6% since 9 November) gives the country’s domestic producers an edge.

On top of this, attention has shifted to the supply side now. One of the factors mentioned in the Reuters report is European Union (EU) reforms to its quota system. While this will be implemented in September 2017, this factor has been known for years. At best, it can have a limited role in explaining falling sugar prices. The lifting of quotas on EU sugar output could see the region’s imports decline and exports increase, which means more sugar in the market.

However, other fears of higher output may have some merit. Rising sugar prices by itself gives more incentive for sugar cane farmers to cultivate more. Even now, white sugar prices are up by a third over the start of 2015. Consider Brazil, for example. Data from Unica (the country’s sugar industry association) shows sugar cane output in the south-central region between 16 April and now is up 3.7% but that of sugar is up by 17% as output has shifted away from ethanol. The share of sugar has risen to 46.8% to date, against 41.7% a year ago. However, Thailand’s output is expected to be down by 5%, according to estimates made by the US department of agriculture. Higher realizations could lead to higher planting for the next crop season in major growing countries.

Back home, the latest update from the Indian Sugar Mills Association (Isma) shows that sugar output till 30 November is up by 17%, but it is early days, considering the season started in October, and mills started crushing early this season. Due to bad weather, India’s sugar output is projected to be lower than last year. Isma also said that lower despatches of sugar from mills have led to a fall in ex-mill prices across the country. Even with the recent dip in prices, rating agency Icra Ltd expects sugar mills, especially in Uttar Pradesh, to benefit from higher realizations.

Although sugar imports attract a duty of 40%, giving ample protection to the domestic industry, a continued bearish trend in global sugar prices can be a dampener for the local industry. It could see a threat emerge from imports or at least act as a sentimental cap on prices.


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