Who is right on the sugar price outlook?
While Fitch Solutions sees prices averaging in 2023 their highest in more than a decade, Rabobank has a far more downbeat view, foreseeing values falling for the first time since 2017.
While the futures curve is siding more with Rabobank’s view, there is one longer-term factor that is on Fitch’s side.
And that is that the market has, as if a top magician, got its audience looking the wrong way.
And for some time. For years, the word “stagnation” when applied to sugar market prospects has been slapped on the consumption side – what with sugar taxes, greater health concerns for demand to contend with.
However, it is production that has actually struggled.
Output vs demand
Since hitting a then-record 177.8m tonnes a decade ago, world sugar output has, with the exception of a jump to 194.2m tonnes in 2017-18, drifted largely sideways since, according to the US Department of Agriculture. Last season’s production reached 180.3m tonnes on its estimates.
By contrast, consumption has, little by little, accumulated growth of 6.5%, or some 11m tonnes, over the same period, the USDA says.
Certainly, opinions do vary on sugar market estimates. The International Sugar Organization, for instance, estimates world consumption rising in 2021 only after three years of decline, and is far more upbeat than the USDA on prospects for the 2022-23 surplus.
However, the USDA is not alone. Czarnikow, for instance, reports that “global sugar production has flatlined for more than a decade”.
Nor does production look like accelerating away any time soon.
Output growth in India, which has been a refuge for output growth in the past decade, is expected to see its production shrink in 2022-23, amid mounting competition for cane from the country’s burgeoning ethanol industry.
Cane, meanwhile, faces competition for land against lucrative crops in countries such as Thailand, where casava is a main rival, while northern hemisphere beet battles for plantings against high-priced gains and oilseeds.
While the ISO sees production swelling by some 9.5m tonnes in 2022-23 – to 182.1m tonnes, a record on its data – that relies very much on Brazil’s output soaring by nearly 8m tonnes.
And that would be very much a one-off, requiring a coincidence of tailwinds.
One of these is the elevated price of sugar versus ethanol, which encourages mills able to alter their output mix to switch more cane to producing sweetener rather than biofuel.
That is already pretty much maxed out at the 48.4%, in terms of sugar’s take of cane, as reported for Brazil’s key Centre South region in the first half of this month.
Another is heavy rainfall which, while hampering cane harvesting in late 2021-22, on the October-to-September timetable used by the ISO, bodes well for 2022-23.
Not only will it boosting yields, but it will offer a windfall of unharvested cane to get the local crushing season off to a flying start when it kicks off in April.
But as for underlying expansion in Brazil’s sugar-making, that still looks a way off.
Even if Brazil’s cane harvest does in 2023-24 (on an April-to-March basis) jump to 621m tonnes as Datagro forecasts, that would be 45m tonnes behind the record set eight years before.
Besides, it is a more than decade since there was any serious investment in extra milling capacity.
The industry is still paying off the debt accumulated in a rapid Centre South expansion programme in around the end of the century’s first decade, predicated on unfulfilled expectations for high sugar prices.
Although debts will shrink to some R$66bn this season, according to Czarnikow, they will remain, more than R$10 per tonne of cane above the level of R$110 per tonne of cane which alarms lenders (and which has been exceeded every season since, and including, 2012-13).
It will take some more time yet of prices above Centre South production costs of about 16 cents a pound to diminish debts and get processing capacity growing again.
That, and the stalling in India’s output growth, should set limits as to how low prices might go for any length of time next year, even if the likes of world recession or a slumping ethanol values do weigh on values.