January 31, 2013

Sugar output is poised to drop for the first time since 2009 as farmers from Mexico to India cut plantings after the biggest two-year price slump since 1999.

Global output will decline to 165 million metric tons in the 2013-14 marketing year that will start in October in most countries, according to DZ Bank AG, Germany’s largest cooperative lender. Production will be a record 172.3 million tons in 2012-13 after three straight expansions, the U.S. Department of Agriculture estimates. Raw sugar in New York will rise 9.6 percent to average 20.5 cents in the fourth quarter, the mean of nine bank estimates compiled by Bloomberg shows.

Farmers are cutting production after futures tumbled 39 percent in the past two years and dry weather in India, the world’s second-biggest producer, encouraged growers to choose crops that don’t need as much water. Global output this year will climb less than 1 percent after rising more than 5 percent a year in the past three years, USDA data show. Demand will rise 2.1 percent while stockpiles at the end of 2012-13 will be 38.3 million tons, the most in five years, the data show.

“You will have a normal increase in consumption because of lower prices and in terms of production you will see a decline in some countries because of big carryover stocks,” said Fabienne Pointier, an analyst at Lausanne, Switzerland-based researcher Kingsman SA, owned by McGraw-Hill Cos. “The 2013-14 season is moving toward a more balanced situation.”

Another Surplus

Sugar fell 16 percent last year on ICE Futures U.S., on forecasts that global production would exceed demand by 6.2 million tons in 2012-13, a third consecutive surplus, based on a November estimate by the International Sugar Organization in London. Sugar was the third-biggest decliner in the Standard & Poor’s GSCI gauge of 24 commodities last year. Prices are down another 4.2 percent this year to 18.7 cents a pound.

The analyst estimates were collected before the Kingsman Sugar Conference in Dubai starting Feb. 2. The annual event attracts 600 people from 45 countries in the city that is home to Al Khaleej Sugar Co., the world’s biggest sugar refinery.

Sugar production in India, the largest consumer, will fall next season from 24.3 million tons in 2012-13, according to the Indian Sugar Mills Association in New Delhi. Drought in the states of Maharashtra and Karnataka, which together account for 45 percent of output, will encourage farmers to cut plantings, said ISMA’s president M. Srinivaasan. Production in Maharashtra will drop to 4 million tons in 2013-14 from 6 million tons this season, according to the Sugar Commissionerate of Maharashtra.

Mexican Farmers

Indian millers’ inability to pay farmers because of high cane prices may mean plantings could also be down in the state of Uttar Pradesh, the nation’s largest sugar cane growing state, according to Jonathan Kingsman, founder of Kingsman, who has traded sugar for more than 30 years.

U.S. farmers will probably reduce plantings in 2013-14 and Mexican growers may not spend too much in husbandry, according to Pointier of Kingsman. Inventories in the U.S. will gain to 2 million tons by August, the most since 2000, the USDA forecasts. Mexico sends most of its sugar exports to the U.S. under the North American Free Trade Agreement, or NAFTA.

The global sugar surplus may shrink to 3.5 million tons in 2013-14 from 4.86 million tons a year earlier, Kona Haque, a London-based analyst at Macquarie Group Ltd. estimated in a report on Jan. 18. Prices will fall to an average 17.5 cents a pound in the second quarter on ICE, and rebound later this year as ethanol output in Brazil takes some surplus away, she said.

Brazil Outlook

“The surpluses are a cumulative issue, so even if we have a smaller surplus in 2013-14 than in 2012-13, it’s still a fourth year of excess supplies,” said Tom McNeill, a director at researcher Green Pool Commodity Specialists Pty in Brisbane, Australia. “Sugar still needs to drop to at least 16 cents to 17 cents for growers to get the message to slow production.”

In Brazil, output in the 2013-14 season that starts in the South American country in April, will total a record 39.9 million tons, Macquarie forecasts. In the center south region, which accounts for about 90 percent of the country’s output, production may reach 35 million to 37 million tons, said Toby Cohen, a London-based director at Czarnikow Group Ltd., which traded sugar in more than 90 countries in 2011. That compares with 34.1 million tons in 2012-13, industry group Unica says.

Brazilian millers may devote more cane to making ethanol at the expense of sugar after the government said it will raise the amount of the biofuel blended into gasoline to 25 percent from the current 20 percent and fuel prices were increased.

Ethanol Mix

A 20 percent jump in Brazil’s ethanol demand would erase the sugar surplus, Ben Pearcy, chief development officer and managing director of sugar and bioenergy at Bunge Ltd. (BG), said on Nov. 28 in an interview at a conference in London. Brazil’s output may be smaller than forecast if sugar prices drop enough to make ethanol more profitable, Czarnikow’s Cohen said.

Brazil will raise the amount of ethanol in gasoline in May, Energy Minister Edison Lobao said yesterday. Petroleo Brasileiro SA (PETR4), the state-controlled oil company, increased gasoline prices at refineries by 6.6 percent, it said in a statement on Jan. 29.

The European Union may also reduce sugar output, according to Stefan Uhlenbrock, an analyst at Ratzeburg, Germany-based F.O. Licht GmbH. Some growers in Europe may try to hold back because of a surplus, while farmers in Russia and Ukraine are set to lower planted areas, he said by phone on Jan. 25.

China Imports

Lower sugar prices may help spur demand. China, last season’s biggest buyer, imported about 740,000 tons in the first three months of 2012-13, customs data show. Imports for the whole season are estimated by the USDA at 2 million tons. In another sign of demand, Indian refiners have contracted to import about 919,000 tons of raw sugar since Oct. 1, ISMA said.

“Going into 2013-14, Brazil looks as though it will be the exception as production elsewhere could be going into reverse,” said Cohen of Czarnikow. “With consumption increasing and rising affordability as sugar prices fall, that should all be doing the job of bringing the market closer to a balance.”

Sugar Price Forecasts
(cents a pound)

Q1          Q2        Q3       Q4
Macquarie             19          17.5      19       20
Commerzbank           19          21        21       22
Rabobank              19          19        18.5     18.5
Lloyds                20.6        21.5      22.1     23
CommonWealth Bank     18          17        16.7     17.2
Standard Chartered    22          21        23       23
Deutsche Bank         19.75       18.2      18.5     20
DZ Bank               20.5        21        22       22.5
Societe Generale      20.4        20        19.1     18.6

Average:              19.8        19.6      20.0     20.5

- Isis Almeida in London at Bloomberg.