Spend Matters welcomes another guest post from Nick Peksa of Mintec.
As world economy forecasts are looking better and investment in commodities continues, I am reminded of a quote that I once read in a book by Bill Bryson: “Even though sugar was very expensive, people consumed it till their teeth turned black, and if their teeth didn't turn black naturally, they blackened them artificially to show how wealthy and marvelously self-indulgent they were.”
So it does not hurt to re-explore the sugar markets. 2013 was another year of excellent global production. The international markets are again expecting excellent carryover stocks in 2013/14, and the price slide since late 2011 continues. Despite a slight recent rise in some US prices, sugar remains down significantly year on year.
Global sugar production in 2013/14 is expected to be up a little year-on-year from last season’s record output and will be just under 175m tons. High global production since 2011, which is due in part to rising output from the world’s largest producer and exporter, Brazil, has led to the build-up of stocks, which coming into the 2013/14 season stood at 38.4m tons. With consumption expected to reach 167m tons, stocks will increase further this year, likely keeping world prices low.
In Brazil, sugar output is forecast to rise 5% year-on-year to 40.4m tons. This is despite the government introducing a number of tax incentives designed to encourage producers to use their sugarcane for ethanol production instead of sugar, as well as increasing the required percentage of ethanol to be blended into gasoline— from 20% to 25%. Until recently, sugar production has been more profitable than ethanol production due to the high prices seen in the sugar market. However, the continued drop in sugar prices has meant that ethanol production has become increasingly competitive, and this may also lead to further increases in ethanol production and a slowdown in the growth of sugar production. However, the Brazilian economy has slowed, reducing demand for ethanol and consequently leading to a reduced demand for sugarcane from the ethanol sector. High sugar availability for the food industry is expected to continue.
US production for 2013/14 is forecast at 7.8m tons, down 5% from last season due to a reduction in the planted area for sugar beet. Despite the drop, it should be remembered that production last year reached the highest level in 10 years. Consumption is expected to rise 2% to 10.5m tons. US demand for imports is expected to rise by 19% to 3.1m tons, with Mexico expected to remain the largest supplier. This has led to the slight increase in US sugar prices seen recently.
Sugar remains one of the most protected commodity markets in the world, with both the US and EU keen to defend local producers through the use of subsidies, import restrictions, and tariffs. This means world sugar prices will only have a limited effect on domestic prices, but given the trend in pricing seen over the last two years, we can all blacken our teeth the natural way.