Global sugar market to remain volatile despite expectation of 2017/18 surplus

Published: 05/12/2017, 7:52:19 AM

Though the consensus among market analysts remains strongly in favour of a global surplus for 2017/18 following two years of deficit, a lot of factors could create a very volatile market over the next year or more despite apparent increase in sugar production, reports Sugaronline.

Both S&P Platts and Sucden told industry participants at New York Sugar Week that next season's surplus should be around 3 million metric tonnes, in line with estimates by other trade houses and analysts, but Datagro is taking a more conservative view with expectation of a balanced market with about a 200,000 tonne deficit.

Plinio Nastari, head of Datagro, told the ISO Datagro Sugar Week event that when the global stocks-to-use ratio is under 40%, markets are under stress so any changes in weather or main fundamentals can have a major impact. He estimates the stocks-to-use ratio at 36.9% on September 30 and a similar level for September 30, 2018.

India, Thailand and Brazil have all been susceptible to production shifts due to weather, not to mention Australia getting hard hit by cyclones and current concerns about the impact of recent frosts on the European beet crop.

"A small surplus is bullish because it shows industry is not able to respond after a few years of deficit," Sucden's Emmanuel Jayet, Head of Research, told the ISO Datagro event. "So we have to look at the stocks to determine if a small surplus is bearish or bullish. Currently it is in the middle. Is the small surplus already priced into the market?"

Add in Datagro's expectation of another 1 million tonnes of import demand from India this season, and volatility grows.

Current low prices below 15 cents per pound on the New York #5 are not enough to encourage further supplies in the market, said Nastari, as Brazil is the only producer that can break even at those levels but it doesn't promote further investments. Thailand, India, Europe and other producers won't be encouraged either yet those are the countries that will create export availability, he said.

With 3 million tonnes either more or less enough to cause price shifts in the market, S&P senior agriculture analyst Dr. Claudiu Covrig says the 3 million tonne surplus would weigh on prices but any weather challenges or other loss in production could provide bullish support.

With aging sugar cane in Brazil continuing to reduce yields, combined with a lack of bis cane availability, São Martinho told the ISO Datagro event that it will be difficult to maintain yields of 77 tonnes per hectare next season, and even that is under ideal weather conditions that would see production similar to 2016/17. Too much rain or not enough at the wrong time could reduce production below the estimates for this year, and perhaps well below.

The need for ethanol following two years of mills favouring sugar production to cash in on higher prices also has the market concerned about the ethanol parity line this year of about 14 cents. Below that level and mills will switch over to more ethanol, and at least 1/3 of this season's crop could still become ethanol if prices fall low enough, São Martinho's commercial director Helder Gosling said.

"If prices fall below the parity line for three weeks, mills will start switching to ethanol," said Covrig, who estimates 46% to 47.23% for sugar production.

According to Covrig, as much as 30% of centre-south production comes from small and medium-sized mills too far inland to benefit from producing sugar so focus primarily on ethanol, further reducing expectations for sugar production.