Sugar Glut Easing as Bear Market Spurs Supply Cuts

(Businessweek) – Sugar production is poised to contract for the first time in five years just as consumption expands to a record, diminishing a global glut that has kept prices in a bear market since September.

Production will drop 1.8 percent to 178.5 million metric tons in the marketing year starting Oct. 1 as demand rises 1.9 percent to 175 million tons, the London-based International Sugar Organization estimates. Futures will rally as much as 13 percent to 18.5 cents a pound by March, the end of the season in Brazil, the biggest producer, according to the median of 13 trader and analyst estimates compiled by Bloomberg.

Sugar plunged 54 percent since reaching a three-decade high in 2011 as growers from Brazil to Australia and Mexico raised output. The anticipated drop in production contrasts with analysts’ estimates for record supply of soybeans, wheat, corn and rice. Macquarie Group Ltd., Australia’s biggest investment bank, says sugar demand will exceed supply by 2.5 million tons in 2014-2015, the first shortfall in five years.

“The surplus is not going to last forever,” said Abah Ofon, a Singapore-based analyst at Standard Chartered Plc who expects an average of 20 cents a pound in the first quarter.“There’s less incentive to increase production. We’ll see a drop in supply.”

Production Drops

Global per capita sugar consumption has grown to about 23 kilograms (50.7 pounds), from about 5.1 kilograms at the start of the 20th century, according to Sucres et Denrees SA. Israel eats the most at 66 kilograms per person and Bangladesh the least at 8 kilograms, the Paris-based sugar trader says.

Raw sugar dropped 16 percent to 16.43 cents a pound on ICE Futures U.S. in New York this year, the second-worst performing agricultural commodity in the Standard & Poor’s GSCI Index of 24 raw materials, which fell 0.2 percent. The MSCI All-Country World Index of equities advanced 11 percent and a Bank of America Corp. index shows Treasuries lost 2.3 percent.

Beet will contribute most to the drop in output because farmers need to replant it every year. Cane regrows for several seasons. Farmers in India, the 28-nation European Union and Russia cut acreage as prices fell, said Leonardo Bichara Rocha, a senior economist at the ISO. The group, whose members include more than 80 countries, expects the surplus to narrow to 3.5 million tons next season, from a record 10 million tons.

The last time global output contracted was in 2008-2009, the first of two consecutive years of deficits. Prices more than doubled in 2009, gained 19 percent in 2010 and peaked at 36.08 cents a pound in February 2011.

Beet Growers

Beet-producing nations, which account for 19 percent of the market, will cut output by 8.3 percent to 34.3 million tons next season, Czarnikow Group estimates. The London-based company, which traded 2.4 million tons of raw sugar last year, anticipates a 300,000-ton gain in cane-derived supply to 148.5 million tons.

Prices may keep falling because Brazilian production doesn’t usually peak until July or August. Futures may drop as low as 14 cents to 15 cents, before rebounding to as much as 18.5 cents by March, said Paul Deane, an agricultural economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Melbourne.

Brazilian output will expand about 2.5 percent to 41 million tons in the local marketing year that began April 1, said Bichara Rocha. The Brazilian real, which weakened this month to the lowest level against the dollar since 2009, is spurring exports. Shipments increased 13 percent in May and 16 percent in June from a month earlier, government data show.

Thai Harvest

Thailand, the largest shipper after Brazil, will increase output 10 percent to a record 11 million tons in the year that begins in November, according to Thai Sugar Millers Corp. Exports may rise as much as 6.7 percent to 8 million tons from an estimated 7.5 million tons, the Bangkok-based group forecasts.

Prices probably won’t exceed 18 cents this year because the previous season’s record crops enlarged stockpiles that still need to be consumed, Citigroup Inc. said in a July 15 report. The U.S. Department of Agriculture predicts global inventories of 38.2 million tons at the end of 2013-2014, about 17 percent higher than the average over the past five years.

The USDA predicts a 4.8 percent expansion in global imports to a record 52.3 million tons as lower prices spur global demand. Of the 20 biggest buyers, 17 will increase imports in 2013-2014, the department says.

Monsoon Rains

India, the largest grower after Brazil, will produce 23.5 million tons next season, or about 1.5 million tons less, according to the median of estimates from four traders, five millers and two executives compiled by Bloomberg.

That’s still more than originally anticipated by some analysts. Kingsman SA had forecast 22.3 million tons and now predicts 23 million tons to 24 million tons after heavier-than-expected monsoon rains. The Lausanne, Switzerland-based research company is a unit of McGraw-Hill Financial Inc. (MHFI:US)’s Platts.

Farmers in China, the third-biggest consumer, will reduce the cane area by about 2 percent to 1.75 million hectares (4.32 million acres), the USDA forecasts. Production in the U.S., the third-largest importer, will drop 4.1 percent to about 7.84 million tons, the department estimates.

Millers in Brazil’s center-south, the main growing region, will divert more cane than previously expected to boost ethanol production after rains cut the crop’s potential to yield sugar, according to Datagro Ltd., the Barueri, Brazil-based research company. Millers will use 53.8 percent of the cane to make the biofuel, from a previous estimate of 52.6 percent.

Biofuel Demand

The price of hydrous ethanol at the pump, the fuel used to power Brazil’s flex-fuel cars, is 62.3 percent to 63 percent that of gasoline, making it more attractive for consumers. That should spur demand for the biofuel and encourage more cane to be diverted away from sugar production, said Plinio Nastari, the president of Datagro.

“Prices will encourage lower production throughout the 2013-2014 season,” said Tracey Allen, an analyst at Rabobank International in Sydney. “With that we’re seeing the global sugar surplus shrinking.”