The world sugar pipeline is set to overflow

April 18th, 2012


Category: Sugar

(NASDAQ) – The Kingsman research firm predicts a worldwide surplus of 4.7 to 5.7 million metric tons of sugar over the next 18 months, according to the Wall Street Journal.

In addition to pushing the iPath Sugar Total Return ETF ( SGG , quote ) downwards, the surplus may have an impact on ethanol supplies.

SGG is down almost 10% in the last month, reversing a year of rising prices that peaked in mid-March 2012.

Sugar production is booming in Thailand, Russia, and India, which is now the world’s second largest sugar producer. Kingsman Chief Executive Jonathan Kingsman told the Wall Street Journal that “There should still be a surplus , even if you take a worst-case scenario in Brazil.”

Brazil is the world’s largest producer of sugar, but had a disappointing crop last year due to a lack of rainfall and rising production costs. According to Kingsman, “the cost of production in Brazil has increased so much that it’s allowing other producing countries to be competitive.”

Despite the setbacks, however, Brazilian production rose 3.2% this year. The country is still expected to produce half the world’s sugar.

Like Saudia Arabia in oil, Brazil has such a dominant position in the market that it can influence prices by adjusting its output. Sugar is currently trading at about 23 cents per pound, and is expected to remain near that price. If prices drop, however, Brazilian mills can shift over to ethanol production. This should keep a floor under the prices of both sugar and SGG, though it may ultimately spell bad news for fans of ethanol stocks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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