The global sugar market is currently characterised by nervous and choppy conditions. Prices have faced tremendous downward pressure in recent months. Two straight years of global surplus, exports from India and Brazilian harvest pressure have all combined to pressure the sugar market down. By early June, rates plunged to 18.9 cents a pound - a 22-month low - but recovered in recent days to test 22 cents. The extent of price collapse is stark when contrasted with 27 cents a pound a year ago.

At least in the short-term, the fundamental outlook remains unsupportive for a number of risky assets including sugar. The overall macroeconomic backdrop is a cause for concern with a combination of weak global growth signals, European sovereign debt crisis, slowing Chinese economy, falling crude prices and risk aversion the dominant theme. Interestingly, exports from the world’s two largest producers have been encouraged by a rapid depreciation of the local currencies vis-à-vis the US dollar in the last 2-3 months, making exports attractive despite lower dollar prices. .

Specifically, a pickup in Brazilian sugar production and an expansion in Indian sugar exports (3 million tonnes at last count) continue to weigh on prices. For Brazil, the profitability of sugar export compared to the domestic market has increased in recent days. However, experts believe, a floor price may have already emerged at about 20 cents a pound. If prices continue to remain below the 20-cents mark, there is risk that Brazilian mills will switch from sugar to ethanol production.

Given a close to 8 million tonnes surplus in 2011-12 (estimated production 175 million tonnes and consumption 167 million tonnes) and the possibility of a repeat of surplus situation in 2012-13, world sugar prices are likely to stay under pressure. No wonder, investors have stayed in the sidelines and are watching the developments. On current reckoning, there will be little investor interest.

Weather concerns

However, prices are not without upside risks. Weather provides the key upside risk to sugar prices. Prolonged wet weather in Brazil can potentially hurt yields and in turn sugar production. There are apprehensions of dry conditions in India (El Nino weather event) in July- August.

While weather concerns remain, there are good chances that India will once again harvest a decent volume of sugarcane crop beginning October. The acreage planted to cane is estimated at 5.2 million hectares. Under normal weather conditions, one can expect about 340-350 million tonnes of sugarcane and production of not less than 26 million tonnes sugar in 2012-13. With demand estimated at about 23 million tonnes , India will still have an export surplus of 3 million tonnes once again.

However, the onset of southwest monsoon has not been as vigorous as expected. How it would progress remains to be seen. Although the India Meteorological Department is sanguine about a ‘normal’ monsoon, it is clear that weather risks persist. Additionally, consumption demand will pick up during August, September and October months because of a series of festivals. So, the Indian sugar market and in turn the world sugar market will be weather-driven in the next 2-3 months and choppy conditions are likely to prevail.

(This article was published on June 25, 2012)
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