Sugar Futures Rise as Indian Sugar Mills Start to Default on Contracts

Published 2022년 11월 21일

Global sugar production is expected to rise to 182.14 million mt in the 2022/23 MY, up by 6% from 172.66 million mt last season due to higher yields and processing in the globe’s two major sugar producers, Brazil and India. The anticipation of higher production resulted in a marginal weakening of sugar futures between July 2022 and October 2022. However, uncertainty still looms in the industry. For instance, a sudden rise was in the prices of sugar futures as November started primarily due to the weaker Brazilian real, concerns about lower exports from India and rising prices of ethanol in the global market. This was further triggered by Indian sugar mills canceling their contracts to deliver sugar.

In August 2022, the International Sugar Organization projected that for the marketing year (MY) from October 2022 to September 2023, global sugar production is expected to rise to 182.14 million mt, up by 6% from 172.66 million mt last season. Production is expected to rise due to higher yields and processing in the globe’s two major sugar producers, Brazil and India. The higher production has weakened sugar futures, as seen between July 2022 and October 2022and even flushed down the FAO Sugar Price Index (SPI) in October 2022. Sugar futures were stable at around USD cents 17.20–17.30 per lbs in the month of October 2022, compared to USD cents 17.50 - 17.60 per lbs in October 2021. The SPI prepared by the FAO for October 2022 was down by 0.6% compared to September 2022 and 8.5% less than the same month in 2021.

The fall in raw sugar futures, as well as the price index, was limited due to rising inflationary pressures, which increased the cost of production for sugar producers and processors. In addition to this, concerns regarding sudden rainfall, which is hampering harvest progress in Brazil, and the delay in the start of the campaign in India further limited the MoM decline in prices of raw sugar futures. Raw sugar futures, as traded on the Intercontinental Exchange (ICE) were moving at comparatively low levels, but only for a couple of weeks, whereafter futures hit a seven-month high on November 16, 2022. Raw sugar futures increased to USD cents 20 cents per lbs a level not seen since mid-July. This sudden rise was primarily due to the weaker Brazilian real, concerns about lower exports from the main sugar exporting countries (Brazil and India) and rising prices of ethanol in the global market.

Raw Sugar Future Prices

Source: ICE.

Out of all the above, concerns over lower volume of exports from India seemed to be prominent as many sugar processing units in India started defaulting on their contracts. According to Reuters, Indian sugar mills started renegotiating and even pulling out of contracts after the government cut this year's export quota. As a result, some traders covered short positions with futures contracts, causing prices to rise. For the upcoming year, it is expected that India will grant export permits for only 6 million mt of sugar until May 2023, nearly half of the quota from the prior year. Sugar prices are expected to remain high in the coming months compared to the previous season as the uncertainty about the global sugar supply continues to grow.