Czarnikow Says Higher Sugar Prices Needed to Sustain Investments

(Businessweek) – Sugar prices, which gained the most since 2011 last month, must climb further to sustain investment in the industry in the biggest producing nations and avoid future shortages, according to Czarnikow Group Ltd.

Futures in New York will need to rise to 22-23 cents a pound to provide the returns needed, the London-based company said in a statement e-mailed today. The world’s leading producers are reporting losses and many are asking for state support, said Czarnikow, which traded 2.4 million metric tons of raw sugar last year. Prices are below production costs in most nations, it said.

“For now, things are still relatively OK from a supply and demand point of view,” Toby Cohen, a director at the company, said by phone today. “There isn’t a shortage, though the balance is tightening up. The problem is that there will be a shortage if we don’t get a sustainable price for the industry.”

Raw sugar prices, which rose 11 percent last month, slipped 0.9 percent to 19.33 cents a pound this year. Futures slid 16 percent in 2012 and 27 percent in 2011 as producers from Brazil to Australia boosted output, resulting in surpluses. Global supplies will be 2 million tons bigger than demand in the 2013-14 season as consumption advances, estimates Czarnikow. That’s a 79 percent decline from the previous year’s surplus.

“In a balanced market environment, with supply and demand relatively aligned, the clearing price of the market should be the level that provides a normal return to producers,” Czarnikow said in the statement. “That’s not what we are seeing today.”

Ethanol Returns

In Brazil’s center south, the main growing region of the world’s biggest producer, 44 out of 350 mills aren’t operational, Cohen said. As returns from ethanol production decline, producers have to rely on earnings from sugar to make the biggest contribution toward their costs, according to Czarnikow. Three mills closed in northeastern Brazil in the past month alone, he said. The South American nation uses sugar cane to make both the sweetener and the biofuel.

In India, the world’s second-biggest producer, more than a third of the nation’s 516 mills are in financial difficulties. Higher prices paid for sugar cane in China and Thailand, the second-largest exporter, are increasing costs, Czarnikow said. Cane prices in both nations doubled on the past five years, according to the statement.

“2013 has been a good year for consumers and the refining sector but it has been a bad year for those involved in primary production,” Czarnikow said. “The sale of sugar below operational cost of production, rising levels of debt and insolvency all highlight the damage that low prices have done.”