Sugar Trade: Prices to Rise to 24-year Highs

At 10:18 am of Tuesday 17 January, the New York Board of Trade web site showed future sugar prices at US 15.40 cents per pound of raw sugar. At the end of the preceding week, prices on March 2006 contract closed at 15.27 c/lb, May 2006 contracts at 15.31 c/lb, conveying the bullish wave and sentiment that have market analysts forecasting 24-year highs in sugar prices during 2006.

Several developments in the fundamental aspects of the industry are clearly at play: Production shortfalls are expected in some important sugar countries such as Thailand and China (sending a reminder that sugar is a product manufactured out of an agriculture crop) as well as some not-too large countries, like those in the English-speaking Caribbean (although it seems that Trinidad’s SMC poor management has been saved by January rains). The International Sugar Organisation (ISO) estimates that world production would be 1.5-2.0 million tonnes below world consumption. Brazil is, and will continue being, the main actor and factor in the international sugar scenario. The striking synergy of producing energy (ethanol) and sugar continues supporting the growth of the Brazilian ethanol-sugar complex, and, at present, high ethanol prices (related to high oil prices and increasing domestic demand) are attracting higher production and, therefore, use of greater proportion of the cane produced in the country. To make the short-term picture much more complex, availability of Brazilian sugar is relatively “tight” in world markets in the latter part of the 2005 harvest in the Centre-South region (around Sao Paulo state). The Centre-South ethanol/sugar industry said it would start the 2006 campaign earlier than usual, to avoid ethanol shortages in the domestic market.
Adding international news that some countries want to legislate ethanol use in a mixture with gasoline, the medium- and long-term picture is one where sugar will see more competition for cane, mainly, but not only, in Brazil. Pressing the picture further, an European fund management company said: in “two or three years from now, there will be giant ethanol carriers roaming the high seas just as oil tankers do now.”
In shorter-term developments, trade policy decisions are exerting their influence on the markets. The World Trade Organisation (WTO) gave the European Union until 22 May 2006 to comply with its ruling over illegal subsidised sugar exports. Market analysts estimate that the WTO ruling makes practically overnight the EU the holder of a surplus of about seven million tonnes of refined sugar. Interestingly enough, it is not yet clear what the EU would do with it. While analysts expect the EU will sell the sugar in the world markets – and markets are already feeling the downward pressure on refined prices – , this very significant volume of refined sugar just “hangs” over the market. After June 2006, the EU will may limit exports to the WTO-approved 1.27 million tonnes, then, analysts ask, what countries would help filling the EU gap (Brazil? India? Thailand? – after its current drought); assuming that some 5 million tonnes of EU refined sugar will not longer be available. In the long-term, refined sugar prices seem to be ready for a sustained increase.
Sugar consumption is also a pressing factor. The US Department of Agriculture (USDA) estimates that US sugar consumption would be about 9.1 million tonnes in the October-September season, the highest in five years. Some other countries, like Pakistan and Indonesia, have announced sugar imports in 2006, adding pressure to the expected production deficit in the year. Small countries, like the English-speaking Caribbean (Trinidad, St Kitts, Jamaica, Barbados) may add their share to increased demand… in a tight international market.
And then, there is the speculative side to the market, with non-commercial traders (i.e. traders not interested in the physical sugar, only in making money from sugar transactions), which has gained greater influence in the past two decades.
Over a dozen and a half traders based in New York were asked in mid January about prices for 2006: they all agreed that prices would probably climb to US 18 c/lb, a level comparable to the early 1980s. In Canada, a top official of a refiner, ventured to say: “I don’t know if we’ll see 25 cents, but I’m hearing lots of people talk 20 cents.” Whether these are Canadian or US cents, the forecast is for sugar prices to rise considerably this 2006.

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