Expected Shortfall Gives Sugar a Boost

(Wall Street Journal) – The world’s sugar glut is melting away.

Global production of the sweetener is set to fall short of consumption in 2015, snapping four consecutive years of oversupply, largely due to falling output in top exporter Brazil.

The supply concerns are driving sugar prices higher. Raw-sugar futures rose 4.1% last week, the biggest weekly percentage gain in almost two months. The July contract, which is the most actively traded, ended the week at 17.91 cents a pound on the ICE Futures U.S. exchange.

Extremely dry weather in Brazil early this year hurt the sugar cane’s development, putting the nation’s sugar production on track to decline for a second year in a row. Brazil is the source of about one-fifth of the world’s sugar.

Mills in the main growing region produced 1.5 million tons of sugar from the start of the harvest through the end of April, 13% less than the same period last year, according to Unica, a Brazilian sugar-industry group.

Plinio Nastari, president of Brazilian consulting firm Datagro, said mills are likely to produce 36.4 million metric tons of sugar by the end of the harvest, 2.9% less than in the previous year.

“Brazil will probably not add much sugar to the world in 2015” either, Mr. Nastari said, adding that low prices last year were a disincentive for producers to improve their yields.

At the same time, demand has been picking up. Globally, sugar consumption could exceed production by about 2.5 million metric tons in the year beginning Oct. 1, Mr. Nastari said.

The International Sugar Organization doesn’t expect the production shortfall to hit until the following year.

It expects demand and production to be on par this year but said consumption is likely to exceed output by 4 million tons in the year beginning Oct. 1, 2015.

“There’s a good potential we’ll see higher prices because of that,” said Michael McDougall, a senior vice president at brokerage Newedge, adding that prices could reach 19 to 20 cents a pound this year.