Sugar production in Asia is expected to be significantly lower in the 2016/2017 sugar season, as the 2015 El Nino-induced drought pulled output down to a five-year low, according to Rabobank's latest report 'Hurry Cane: Managing Higher Sugar Prices in Asia' released on Monday.
India, the world's second largest producer of sugar, will witness a fall in production by 3.7 million tonnes due to consecutive droughts in 2014-15 and 2015-16 and will become a net sugar importer in 2016 -17, the report adds.
Despite being the largest sugar consumer, India remains one of the fastest growing markets for non-household sugar with confectionery and soft drinks being the two key sectors driving consumption. However, as the largest consuming sectors, processed fruit-based products, confectionery and the traditional sweet-making industry will continue to drive absolute volume growth,
The twin impact of sustained demand and lower 2015-16 production has pulled Asian sugar inventory to historic lows. Depending on local supply-demand gap, sugar prices in the region has increased by 30%-50% from levels seen in CY2015. With subdued 2016-17 production expectation and sustained growth in demand, Rabobank estimates that there is enough tailwind to support current levels until Q4 -2016 until there will be further information available on the 2016-17 sugar season supply/demand balance.
At current price level industrial buyers are paying 42% higher than 2015 prices implying an additional $3.5 billion on the regional cost of goods sold (COGS). For individual countries, the full impact will depend on the response of the local refined sugar price to the supply/demand gap. For sectors with a direct dependence on sugar (like soft drinks, rum, confectionery and condensed milk) as a raw material, the impact will be particularly severe. For example, in India, prices have risen quickly over the past six months. And if downstream users are slow to react, it could mean ballooning in costs and a squeeze to profit margins, the report added.