US sugar futures hit their lowest level in 20 months in New York last week despite what seems to be apparently bullish news.
Sugar demand from ethanol producers, mainly in Brazil, continues to grow; and the slump in US corn prices last week after the biggest crop ever was forecast from initial planting reports from the USDA, wasn’t seen as being bad for sugar because much of the higher output will go to US ethanol producers and not into sweeteners.
And yet prices finished at 9.80 USc/lb after earlier touching 9.71 USc, just above the low of 9.66 USc/lb reached in August 2005.
But Monday saw prices rise in a little rally as traders covered short positions as the price moved up to to close at 9.98 USc a pound. Traders had ridden the price down last week but the speed of the recovery forced them to cover quickly, driving prices up.
Sugar prices have fallen 41 per cent in the past year while corn prices have risen 50 per cent because of rising US demand for ethanol. America favors ethanol made from corn and levies tariffs on shipments of Brazil’s sugar cane-based fuel.
Corn is also the raw material for high fructose corn syrup, a rival sweetener to sugar.
The rise in corn prices has made sugar appear viable to some users, even after the fall in corn prices after the crop news 10 days ago.
May sugar rose 0.18 cent,to 9.98 US cents a pound in New York, the most active day in a month.
The latest rise is expected to be temporary because of rising world production and stocks.
Traders said the good news from rising demand was more than offset by reports of rising production in Brazil and India. Ethanol is proving to be a double edged sword in Brazil. the high prices of 14 months ago, when the world price touched 19.73 USc/lb prompted more land to be planted to cane, further boosting acreage already growing quickly because of the demand for ethanol feedstock.
The impact of growing output in major producing countries led by Brazil and India has been reflected in reports from the International Sugar Organisation which said late last week that the world sugar surplus this year will be revised up to between 8.5m and 9m tonnes, from the 7.2m tonnes forecast in February.
That compares to the original 2007 estimate from the ISO last August of just 2.17m tonnes last August.
That’s bad news for CSR Ltd which is struggling to extricate itself from sugar, according to some reports, or looking to move into the Brazilian industry if an opportunity arises, according to other reports in the past year.
But according to the Australian Bureau of Agricultural and Resource Economics (ABARE), the weakness in sugar won’t be going away quickly.
In fact it is here to stay for sometime, raising the prospect that the rebound in the industry’s fortunes is temporary and more government assistance will be sought in coming years.
ABARE forecast in its Outlook paper on sugar that “The world indicator price for sugar (New York no.11 raw spot fob Caribbean) is forecast to fall by 27 per cent in 2006-07 to average US11.5 cents a pound (c/lb).
“High sugar prices during 2005-06 prompted a substantial increase in global production in 2006-07 and an associated rise in stocks as consumption grew by less than output. In 2007-08 production is expected to increase further and again exceed consumption, with the result that prices are forecast to fall by 17 per cent to average US9.5c/lb.
“Sugar prices are projected to decline in real terms over the majority of the outlook period (to around 2011-2012). This is despite rising ethanol demand and production and export limiting reforms in the EU sugar industry.
“Although ethanol consumption is expected to rise, cane production is projected to grow sufficiently to facilitate increases in both sugar and ethanol production.
“Despite lower sugar prices in the next few years, world production is forecast to continue to rise because sugar cane, from which 80 per cent of the world’s sugar is derived, is a long lived crop that does not need annual replanting.
“Towards the end of the outlook period prices are expected to rise slightly as consumption surpasses production and stocks begin to fall. Despite the late improvement, real prices in 2011-12 are projected to average around US9c/lb (in 2006-07 dollars), over 20 per cent less than the 2006-07 estimated price.
“Australian sugar production is forecast to increase by 10 per cent to 5.1 million tonnes in 2007-08. The increase reflects a recovery from the damage caused by cyclone Larry in early 2006 and less severe effects of sugar cane smut than originally expected. Providing that the areas under cane are moved into non smut susceptible varieties as normal replanting occurs, sugar cane smut is not expected to have a significant effect on sugar production in 2007-08, or over the period to 2011-12.
“Higher production is forecast to flow through to a 9 per cent increase in the volume of exports to nearly 4 million tonnes in 2007-08. However, lower world prices mean that the value of exports is forecast to fall by 12 per cent to $930 million.
“Given the limited availability of land for expanding the area planted to cane, there appears to be significant agronomic constraints on the extent to which Australian production of sugar can expand – especially in Queensland. Nevertheless, between 2007-08 and 2011-12, Australian sugar production is projected to increase by 4 per cent to 5.3 million tonnes as a result of higher yields and higher CCS values.
“With higher production, Australian exports of sugar are projected to rise to 4.1 million tonnes by 2011-12. Although higher shipping volumes will offset some of the effect on earnings of lower world prices, the value of sugar exports is projected to fall to around $900 million (in 2006-07 dollars) in 2011-12,” ABARE said.
