London, 21 December 2010

2010 has been a year of extremes for the sugar market. Price action has been characterised by a level of volatility not seen since 1980 as financial and fundamental pressures have stressed balance sheets. While the underlying bullish structure of the physical market has at times seemed at odds with the price direction and certainly the lower extreme of the price range seen this year, there is no question that the rise in volatility has gone hand in hand with a rise in physical risks. Weather and logistic problems have weighed on an already challenged balance sheet, and have been reflected in record premiums for physical sugars from Asia to Brazil. In this month’s Review Czarnikow take a backward look at 2010 and ask what it is that we have learnt this year.

• The collapse in price to 13c in May, after the February 2010 peak of 30.40c was largely driven by a sudden loss of confidence. But three factors on the fundamental side contributed to this, namely: the surprise generated by an additional 500,000 tonnes of EU sugar over and above the WTO set limit; the continued strength of Brazilian exports; and the larger-than-expected Indian crop.

• The myopic focus on Indian production and the collapse in price blinded the market to the underlying stock problem, which had continued to deteriorate as a result of continued draw-downs by importers and exporters alike. 

• The extended port line-up in CS Brazil is a warning of the risks that importers are now facing given the low stock environment and supply-side dominance of Brazil.

• With the 2010/11 season now set to be sugar’s third consecutive deficit year pressure on operational logistics are likely to continue despite the investments that are now being made to help improve performance.

• The market is now moving into a new price environment, reflecting the increasingly fragile sugar balance sheet. There has also been a steady increase in demand from countries without a domestic production base, raising the level of dependence on the world’s exporters and driving price volatility. Macroeconomic effects have also increased volatility. We expect fundamentally-driven volatility to remain high.

Toby Cohen, head of analysis at Czarnikow, said: “While some of the events that we have seen this year have been unique to the sugar market it is clear that sugar is one of many agricultural commodities that have risen in price as a result of strong underlying demand and unfavourable weather conditions. With the year-end approaching it is clear that sugar remains in an ongoing bull market environment, despite India’s swing from deficit to surplus, as early hopes of the global balance returning to surplus in the 10/11 season have now faded. The deteriorating outlook for the 10/11 balance and limited Brazil off-crop supply seem set to drive direction in the early part of 2011 though at current price levels producers will already be planning for a better year in 11/12 – as no doubt will be the world’s consumers.”

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For further information please contact Czarnikow, Toby Cohen, Peter de Klerk.

Czarnikow operates from a head office in London and a network of 10 regional offices to service clients and customers globally.