Czarnikow sees indeterminate outlook for sugar in 2012

2012 could be a good year for consumers as the easing of commodity balance sheets leads to falling food price inflation. The sugar market is anticipating growth in Brazilian cane production, which should reverse the recent decline and we predict converging sugar and ethanol prices in 2012, with higher global closing stocks resulting from the return to surplus in the 2011/12 season.

However, 2012 looks set to be a challenging year to forecast given low sugar inventory levels, slowing global economic growth and a turbulent macro-economic environment.
Consumption and Price

Sugar prices in many local markets look set to be lower in 2012 than last year, as a result of the return to surplus. This should encourage demand.

Interestingly, recent increased production from outside Brazil has come from countries traditionally seen as key importers, particularly Russia and China.

Importers should benefit from lower world market prices through cheaper import parity, which will in turn give room for domestic prices to decline.

Between 2009 and 2011, sugar consumption grew at 1.1%, below the population growth rate. Greater affordability could see a return to higher growth.
Production

It is becoming difficult to identify where future increases in global production will come from:

Thailand has seen a boom in cane production over the past two years, but it is not clear whether cane will be able to attract further acreage from other crops.

Indian production has yet to match the 2006/07 figure of over 28 million tonnes, and following the export of recent surpluses, if the price incentive is there the balance sheet may be able to muddle through to equilibrium.

EU beet expansion is limited given the politics of the sugar regime.

Russia is approaching self-sufficiency as a result of strong production growth and contracting demand, which has led to a substantial decline in prices.

CS Brazil has invested in increased product in 12/13 and expectations are for an improved crop yield. However any recovery in crop yields is likely to be limited due to the age profile of the cane.
Ethanol

Global ethanol usage fell in 2011 as high agricultural commodity prices encouraged millers to focus on producing sugar.

With global food prices falling and energy values staying firm, we could see a reversal of this trend in 2012.

The scale of current unmet ethanol demand combined with the convergence in price dynamics between sugar and ethanol should trigger a rise in ethanol usage.
A front loading of supply?

Tighter economic conditions will impact the functioning of the physical market at an operational level.

The tightening of commercial credit lines, which have already impacted the ability of producers to hedge forward, also threatens to make operational funding difficult – especially at the start of the season.

We believe that mills will be under pressure to generate cash early in the season, which is likely to see competition to move new crop product.

Toby Cohen, Czarnikow director, said: “With less risk in the sugar balance sheet, the coming year looks set to be a good one for consumers. It is possible that increased affordability of sugar will more than offset the effects of slowing global growth.”

Peter de Klerk, Czarnikow analyst, said: “Mills will be under pressure to generate cash early in the season, which we believe will result in ethanol and sugar prices converging in 2012”


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