Spend Matters welcomes this guest post from Avneet Deol, market analyst at Mintec.
Earlier in 2016, prices for the sugar No. 11 contract on ICE US, the world benchmark for raw sugar trading, looked set to end the year at the highest level in over four years. However, prices subsequently fell in Q4 2016, reaching six-month lows by mid-December. In this article, we look at what factors impacted the sugar market last year and why prices turned around toward the end of 2016.
Sugar prices reached over four-year highs in September 2016, after climbing 68% from the start of the year, on expectations that the global market will experience a supply deficit for the second consecutive season in 2016/17 (September 2016–October 2017). Prices for the dollar-dominated contract also rose due to the USD currency exchange rate. The USD generally weakened against major currencies for the first 10 months of 2016, as a result of uncertainty ahead of the presidential elections and decisions by the Federal Reserve to leave interest rates on hold.
Global sugar production for 2016/17 is forecast to increase 3% year-over-year to 170.9 million tonnes, driven by gains in Brazil and the E.U. Production in Brazil, the world’s largest producer, is forecast to rebound 9% y-o-y this season, as mills directed more sugarcane to sugar production instead of ethanol, due to the higher sugar prices seen in 2016. Despite the increase, global production is expected to be below the five-year average due to declines in India and Thailand, down 14% and 5% y-o-y respectively this season, as a result of damage caused to crops by chronic drought conditions in the previous three to four years.
Meanwhile, global consumption is expected to continue to increase, up 1% y-o-y, reaching a new record at 173.6 million tonnes. As a result, global ending stocks are forecast to fall to the lowest level in six years at 30.8 million tonnes, down 19% y-o-y.
But why did prices fall in Q4 2016 if the global market is expected to see a deficit this season? Several factors were in play during this time, including profit-taking following the sharp increase in prices over the first three quarters of the year. In addition, the USD regained previous losses against major currencies following Donald Trump’s election victory. However, the main driver behind the lower prices is growing confidence that the sugar market will return to a surplus in 2017/18. This is due to expectations that production in the E.U. will increase following the end of production quotas in September 2017.
Like the U.S., the E.U. sugar market is regulated. The 2006 EU sugar reforms concern three main areas: quota management, a reference price and a minimum guaranteed price to growers and trade measures. Under the reforms, sugar production in the E.U. is capped at 13.5 million tonnes, well below domestic consumption, which is an approximate 18.5 million tonnes, according to the five-year average. As a result, the reforms transformed the E.U. from a major sugar exporter, prior to 2006, to a major importer. However, with the end of the quota management around the corner, it will probably not be long before we see the return of sugar exports from the E.U.
So, does this mean prices are expected to continue to fall, say until the start of the new season this September? It’s unlikely. Prices look like they may already be correcting. Why? This is simply because the world will still be left with critically low levels of stocks at the start of 2017/18.