TOKYO -- Global sugar prices are at the highest level in two years amid growing expectations of short supply this year due to adverse weather in India and Thailand, two key producers.
Mounting tensions in the Middle East are also contributing to the rally in prices as the prospect of higher oil prices are prodding mills into crushing more sugar cane to make ethanol to meet surging demand for the biofuel.
The price of raw-sugar futures is hovering around the mid-14 cent a pound (about 453 grams) in New York, up over 30% from the trough mid-September and the highest level since January 2018. Sugar manufacturers in Japan are bracing for a further rise in prices.
Global sugar production in the 12 months to September 2020 is projected to fall 4.2% from the previous season to 179.25 million tons, according to a forecast in December 2019 by Agriculture and Livestock Industries Corp. Global consumption will edge up 0.5% to 185.54 million tons, the administrative agency in Tokyo predicted.
Yet, supply is seen to be crimped by weather disasters in major sugar-producing countries. "In major sugar production centers in the Northern Hemisphere, which are currently in the harvest season, sugar cane crushing is at low levels," said an executive at a major domestic sugar manufacturer.
In India, the world's second largest producer, sugar cane crops in the western parts of the country were hit by a drought in 2018 and excessive rainfall that caused flooding in the summer of 2019. Indian sugar output in the year to September 2020 is forecast to plunge 17.8% to 29.33 million tons.
In Thailand, the world's fourth largest producer, sugar cane crops were damaged by unusually dry weather in central parts of the country and by a drought followed by torrential rain in northeastern regions. Sugar production in the Southeast Asian nation is projected to plummet 19.8% to 12.39 million tons.
Sugar output will also shrink in China, the fifth largest producer, sinking 5.2% to 11.03 million tons.
Furthermore, concerns about oil prices are also putting upward pressure on the sugar market. Fears of an escalation of aggression between the U.S. and Iran caused crude prices to soar earlier this month.
While the oil market has since calmed down, the sharp rise in crude prices has generated expectations that more sugar cane will be used to produce bioethanol, slashing sugar supply, according to Tsutomu Kosuge, head of Marketedge, a commodity and financial market research company in Tokyo.
"The market is gaining momentum after a few years of a slump, but we feel prices are a little too high," said an executive at a major sugar manufacturer.
Other said, however, that sugar prices are unlikely to rise anymore as global sugar stocks are at high levels after two years of glut. World sugar stocks are expected to rise to 39.7% of consumption at the end of the 2019-20 season, well above the proper level of 30-35%.
Japan is heavily dependent on raw sugar imports. The benchmark sugar price in Japan is set quarterly by a government agency which imports sugar from manufacturers at an average import price and then sells it back to companies at a higher price under a system that protects the domestic sugar industry from international competition.
This benchmark price for the first quarter of 2020 rose from the preceding three months because of higher raw sugar prices in the international market. Wholesale prices remain unchanged since the benchmark price for the October-December period fell from the previous quarter.
If raw sugar prices remain at current high levels, the benchmark sugar price in Japan for the April-June quarter will rise by about 3,000 yen ($27) per ton, according to a major sugar producer. Wholesale prices could pick up as a result.
The world is likely to see a shortfall of sugar supply in the 2019-20 season for the first time in three years after a global glut, due partly to declining demand in major industrial nations, kept prices low during the period.
Rising demand in Asia and Africa will push up global consumption. Sugar consumption in Asia in the 2019-20 year will grow 1% from the previous year to 88.25 million tons. Consumers in India and Indonesia will eat more sugar as their income levels rise.
Consumption in Africa will expand 2.5% to 23.37 million tons, driven by vigorous population growth in the continent.
In contrast, consumers in the developed world are cutting back on their sugar intake. Consumption in Europe (including Russia) is projected to dip 0.8% to 32.74 million tons, while the figure for Japan will decline 1.5%.