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Sugar price rises to continue ... 2010

London, 22 December 2009

Production Deficit Will Drive Increase: The fundamental factors behind the doubling of the sugar price in 2009 (12c/lb to more than 25c/lb) will continue in to next year as under-investment in production will continue to limit supply and put pressure on price, according to Czarnikow Group, one of the UK’s oldest sugar traders.

In 2009, the sugar price reached a 28-year high as sugar crops were hit by poor weather conditions, which helped swing a world surplus to a deficit, taking spot futures values higher and creating a backwardation in the market. The fall in sugar production during the 2008/09 season of 20 million metric tons raw value (mtrv) is the largest ever recorded.

The extreme volatility in the sugar price this year highlighted how dependent the global sugar market has become on Brazil’s ability to expand sugar production and on the politics of India’s rural economy.

Looking forward then, although Czarnikow is expecting to see higher production in the 10/11 season, the production response to price hikes has been very limited. Most of the growth is simply due to expectations of normal weather conditions.

Russia and India have the potential to increase production in the short term. The former is expected to increase plantings over the forthcoming cycle, while in India the two-year crop cycle implies that a 50% recovery in production is possible over the next year. The bigger issue is competition for land between sugar and other commodities, which could work against sugar as rising food prices become a political issue.

Brazil has been the only country where significant direct investment in milling capacity has taken place. However, with the sugar industry still recovering from the financial crisis and having failed to achieve production targets set out at the start of this season due to adverse weather new investment capital is scarce.

Toby Cohen, head of analysis at Czarnikow, said: “Looking at the rise in sugar prices this year, we believe that the full extent of the supply problems facing the market have yet to be reflected in price levels.”

He added: “2009 was an exceptional year, and the indicators are that fundamental supply and demand factors will continue in to next year, even if, as expected, normal weather conditions return. A scarcity of investment capital to increase production, coupled with macro economic trends for increased sugar consumption will continue to add to the pressure on the sugar price.”

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