London, 9 November 2010

Sugar prices are once again back at 30 year highs. Despite early hopes for a rebound in production in the 10/11 season the balance sheet remains fragile as the growth in production has been insufficient to enable stocks to be re-built. With physical sugars trading at a premium to the futures market buyers are facing even higher prices than they did during February.

However, unlike the run up in prices at the start of the year there has been little talk of demand destruction. Following the draw down in stock that took place earlier this year it appears as though the sugar market has more work to do to resolve the supply issues. However, as the rally to 30c earlier this year did not resolve the fundamental tensions in the market, the question everyone wants to ask is, “what happens now?”

•  While the majority of sugar market analysis focuses on the relationship between fundamental trends and global futures market prices, it is domestic prices that have the greater influence on fundamentals. Consumers in many markets have faced prices of around $1,000 / tonne and consumption has continued to grow at this level.

•  Where demand has been less than expected has been largely confined to the Brazilian ethanol market where consumers have a clear choice and can switch to gasohol.

• The rise in sugar prices has had a significant impact on the emerging global market in bio-ethanol and reversed some trade patterns. The US is no longer importing Brazilian ethanol while some Brazilian consumers are no longer finding aggressively priced ethanol a better alternative to gasohol. Higher ethanol prices this year, as a result of low opening stocks and a concentration on sugar production, have curtailed demand growth despite the rise in flex fuel vehicles on Brazilian roads.

•  As sugar stocks have been drawn down the market needs to allocate limited supply amongst much greater demand. As the ability to destroy demand is limited without much higher prices, an alternative is for the market to provide price signals and incentives for northern hemisphere markets to either defer demand until the second half of the year or ‘lend’ sugar to the market during their production season.

•  All agricultural markets are finding similar demand side pressures pushing up against similar supply side constraints. The most apparent evidence of this in the sugar market is the congestion that has affected cargo movement from the Centre South of Brazil.

•  The reliance of the market upon Brazilian supply is the biggest risk facing the sugar market. Though the Centre South has enjoyed a very good season, extensive dry weather has clearly had a detrimental affect on the quality of cane to be harvested during the tail of this season’s crop and once again raw sugar buyers are struggling to secure tonnage during the off-season. It is now very difficult to see where the world will find sufficient raw sugar to bridge the gap without a forced contraction in global refining capacity.

Toby Cohen, head of analysis at Czarnikow, said: “With the global sugar market now back at 30 year highs the price is telling us that the rebound in production during the 10/11 season has been insufficient to resolve the problems built up over the past two seasons. However, it does not seem as though prices returning to the February highs are sufficient to trigger a turnaround. Instead we believe that the market needs to find some way to overcome these challenges.

“An improvement in the supply position from destocking and higher Indian production were critical factors earlier this year but as conditions today are different we believe that additional supply can only come from countries prepared to ‘lend’ sugar to the market. This suggests that the spreads will be critical to resolving the short term physical tightness though it also means that the market will continue to stay volatile while a stronger production response remains illusive.”

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