NEW DELHI – A drop in sugar output in India and Brazil, the two largest producers of the commodity, is likely to push the market into a wide deficit this year.
Despite the likely deficit, sugar prices have remained largely subdued, with the front-month raw sugar contract on IntercontinentalExchange remaining well below 13 cents a pound for more than nine months.
Prices are likely to move within a range of 11.5-13.5 cents a pound for the next few months, said Martin Todd, managing director of UK-based agribusiness consultant LMC International.
"Everybody knows there are two main suppliers of sugar in the world market–Brazil and India–and they both have pricing points in that range today," Todd told Cogencis in an interview.
The deficit in the global market this year, he says, is only in terms of production and consumption. India and a few other countries are sitting on a large carryover stock, which could come to the market when prices rise.
"…There is no shortage of sugar. All you have to do is pay 13 cents and you can have as much sugar as you need", Todd said, adding that this would keep prices range-bound.
Following are edited excerpts from the interview:
Q. What is your view on global sugar prices?
A. I think 12-13 cents a pound is quite a narrow range. I would like to make it bigger. Funds are very short on New York sugar futures. If, for whatever reason, there is liquidation of those short positions, the market could move up quite a lot in a short period of time. I think it will correct eventually, as it would be a good opportunity for sellers to price sugar for export. I would say a range between 11.5 and 13.5 cents a pound is probably more realistic. Everybody knows there are two main suppliers of sugar in the world market–Brazil and India–and the pricing points for both are in that range today.
The pricing point for India is based on the minimum sale price prescribed by the government, while in Brazil, it is based on ethanol and crude oil prices. Both countries have price points that are quite similar today, but that's by chance. If you had a situation where global oil price rose, it would favour more Indian sugar in the world market. But if global oil prices were to go down, it would shift the balance towards Brazil.
Q. How much can India export this season? Is there enough demand?
A. If you look at the current values being offered, it should be a number similar to last year. At the end, actual exports will depend on market signals. There is potential to export 4.0-4.5 mln tn easily, but commercial conditions have to be favourable. If global prices of oil start rising and sugar from Brazil becomes more expensive, there would be more opportunity for India to start selling raw sugar to markets that usually buy the commodity from Brazil.
Indian sugar could go to the two coastal refiners in India, and also to refiners outside India–in West Asia, Saudi Arabia and possibly Southeast Asia.
With crops in Uttar Pradesh looking good this year and the next and no real obvious signs pointing otherwise, millers would be keen to push exports.
Q. Will India be a structural exporter of sugar, at least in the next few years?
A. Yes, definitely. For how many years, it's hard to say. For the next three-four years, for which we have reasonable visibility, I think there is every reason to believe India will continue to export.
It is a very simple calculation. Cane prices in India are fantastic for farmers, so they will continue to grow cane. The yield is doing well, particularly with the introduction of new varieties, and capacity to produce sugar is well over 30 mln tn, maybe closer to 33-35 mln tn. Consumption is at 26 mln tn, more or less. The ethanol programme will grow, but it will be slow. If India has a surplus of 7-8 mln tn of sugar, the ethanol programme will possibly take 1-2 mln tn of that…eventually, maybe 2-3 mln, that's it. The rest would be exported. As long as the weather is reasonable, India should be there in the export market.
Q. According to you, how big is the deficit in the global sugar market?
A. Our deficit number was between 6 mln tn and 7 mln tn, but we are revising the numbers down a little because the crop in India is not looking great…on the other side, we now see production in Brazil and Russia slightly higher. So, the net effect might not be much…it should be around 6 mln tn.
Q. What is your estimate for sugar production in India and Brazil?
A. For Brazil, our estimate is just over 26 mln tn, probably around 26.2-26.3 mln tn. In India, production should be closer to 27-28 mln tn. Earlier, we had expected sugar production at almost 28-29 mln tn, of which a little more than 1 mln tn was likely to be fiverted towards ethanol. Now, we may be closer to 27-28 mln tn, of which more than 1 mln tn would go to ethanol.
Q. A lot of Indian low-quality white sugar is being sold as raw sugar for refineries. Will this continue?
A. Indian low-quality white sugar has a finite market. Refineries would prefer to import raw sugar. If India wants to export more sugar this season, it will have to be raw sugar. There is limited appetite in the market for low-quality white sugar, unless there is a dramatic change and China decides to buy white sugar, which is unlikely in the current circumstances. It is a commercial decision for mills, but if they want to increase exports, the ultimate buyer will want it in the form of raw sugar for refining.
Q. Will the global sugar market move from a deficit this year to a surplus in 2020-21?
A. I am not sure. From the perspective of the global market, there's a brief period of about six months when production is lower around the world, and we need exports from India. But once we move towards the next season, we have a recovery in production in India, and equally good, if not better, production in Brazil. The global market would be very well-supplied again. So, if there is a positive story to tell for sugar prices, it's now. It is not hugely positive; the upside is restricted at a little over 13 cents, as the market would be moving back into a surplus.
Q. Why aren't prices rising when you have such a large deficit this year?
A: Prices are range-bound because to attract sugar to fill the gap, you don't need a price more than 13 cents. Brazil, and also India, will give you more sugar at 13 cents a pound. Though there is a deficit in the market in terms of production and consumption numbers, there is no shortage of sugar. All you have to do is pay 13 cents and you can have as much sugar as you need. $1 = 70.96 rupees