Sugar: Supply Deficit Will Continue in 2020

Published 2020년 1월 22일

Sugar prices in the world market have been unstable. In 2020, the raw sugar price has climbed by 8.1% since January 2nd, according to ISO data. This price surge was mainly attributed to the prospective supply decline within major producers.

Raw sugar price in 2020 January. Source: International Sugar Organization

As the top ten sugar-producing countries account for nearly 70% of global output, small fluctuations in the yields of these countries tend to have a large effect on global sugar markets. As a result, sugar prices in the world market have been unstable. In 2020, the raw sugar price has climbed by 8.1% since January 2nd, according to ISO data. This price surge was mainly attributed to the prospective supply decline within major producers.

Sugar Producing Industry: Raw Sugar Production Affects The Global Trade Swing

Raw sugar is produced from sugarcane only. Sugarcane is the primary source of internationally traded sugar. Sugarcane mills are located close to the cane fields to minimize transport costs and sucrose losses. Mills convert sugarcane into raw sugar which is shipped to refineries for further processing.

In contrast to raw sugar-producing mills, refineries are unconstrained by seasonal production and operate throughout the year. Unlike sugarcane, sugar beets are an annual crop in temperate climate zones. The dynamics of the global sugar market are largely swung by the production of raw sugar from sugarcane yields.

Sugar Production Decrease in Top Exporting Countries

All of the top exporting countries for raw sugar are facing a decrease in production in 2019/2020, mainly due to climate issues. According to a recent forecast by Rabobank, the largest sugar deficit ever will be recorded in the 2019/2020 season. The deficit is expected to reach 8.2 million tonnes.

Production in Brazil, the largest sugar exporter, accounting for 21.1% of global exports, has been forecasted to decrease to 610 million metric tons in 2019. The lower sugarcane production is caused by a reduction in harvested area, which is estimated to have decreased by 2.4% to 8.38 million ha. In addition to the decrease in the harvest area, sugarcane production in Brazil was more heavily geared towards producing ethanol this year, the government actively promoted the production of renewable energies by giving out fiscal incentives. Price went up 12% during the 6 months from July 2019 until December 2019, recording 13.6¢/lb in December.

India is the 2nd largest sugar producer in the world. Sugar production in India is expected to decline by a record 21.6% this season, the steepest decline in over a decade. The erratic monsoons caused a 12% decrease in acreage. Since 2014, India’s sugar production volume has been enough to cover its 26 million tons of domestic consumption, but in 2019/20, the harvested quantity barely meets the domestic demand. The fall in production, however, is not a bad thing for an industry that has faced an oversupply in the domestic market for much of the last five years. The oversupply has kept sugar prices low, impacting the profitability of the industry which in turn has impaired local mills’ capacity to pay local farmers.

Unlike most other producing countries, the United States has both large and well-developed sugarcane and sugar beet industries. In November 2019, raw sugar production projection declined by 572K short tons from the previous month, whilst ongoing weather concerns further threatened the harvest. The US increased the import quota for Mexican sugar by 86%, which has resulted in over 1, million tons being imported this year as compared to 670K tons last year. The US raw sugar price in November peaked at 27.21¢/lb, having increased from 25.57 ¢/lb in January 2019.

Global Demand Is Gradually Rising, Led by Asia and Africa

Global sugar consumption is projected to grow by approximately 1.48% annually, reaching 198 Million tons in 2027. Increases in global sugar consumption over the next ten years are expected to come mainly from developing countries, which will account for 94% of the additional demand. The growth engine will be in two sugar deficit regions: Asia and Africa. With higher demand for processed products, sugar-rich confectionery, and soft drinks, growth prospects are high in urban areas in Asian and African countries where the levels of consumption are low compared to other regions. Indonesia, China, and Malaysia are driving the consumption growth in Asia whilst Algeria, Egypt, and Nigeria are the top importers in Africa. The population growth in these regions is also working as a key driver of growing sugar demand.

Will Prices Continue to Increase in 2020?

Raw sugar futures in New York recorded a two-year high of 14.57¢/lb on January 16th. Considering average seasonal conditions in major producing countries, global production is forecast to fall below consumption due to a global fall in area planted of both sugar cane and sugar beet.

Some of the structural issues in each country that hinder the expansion of raw sugar production still remain. In India, record mill arrears are expected to make the local farmers turn away from sugarcane towards alternative crops, such as rice and pulses. In Thailand, rising prices of cassava are expected to reduce the cane cultivation area. Brazilian production is expected to increase based on projected currency assumptions. However, the rise will be insufficient to offset production declines elsewhere. For the projection in the medium term, Brazilian sugar production is expected to fall as the market is experiencing fundamental shifts in terms of the recent focus on sugar as a feedstock for ethanol.