Global sugar market faces largest supply deficit in five years

The global sugar market is facing its largest supply deficit in five years – in the vicinity of 8.2 million tonnes – following production cuts in India, Thailand and the EU, according to Rabobank’s latest global Sugar Quarterly report.

The supply deficit is now shaping up to be three million tonnes more than anticipated just three months ago, largely due to early-season dryness in India, and later, flooding, which is expected to drive a 21 per cent drop in Indian production.

Thai production is expected to drop by a similar percentage, due to drought earlier in the year, while in the EU, planted area has been scaled back due to lower price signals.

These fundamentals have driven a “notable adjustment in market sentiment”, the report says, with NY futures (basis March) rising above 13 USc/lb.

The report says while “this more positive tone has arguably been long-awaited”, the near-term abundance of stocks (particularly in India)  – coupled with largely disappointing import demand – continues to weigh on prices and will limit further upside.

And, it warns, “any move above the 14 USc/lb level in the coming months could well trigger a shift in the mix back towards sugar (from ethanol) in the next Brazilian campaign.”

In coming months, the report says, the progress of the Indian and Thai harvests will be subject to close scrutiny, while broader macroeconomic and political factors will also have the potential to impact the sugar market. In particular, world oil prices will be a key influence on the sugar/ethanol arbitrage in Brazil and exporters are still awaiting an outcome on the WTO’s investigation into the ongoing dispute over India’s export subsidies.

For the Australian sugar industry, the report says the pace of harvest has now caught up with last season, after lagging throughout, with the harvest now essentially finished.

However, sugar output, according to Rabobank’s commodity analyst Charles Clack, is forecast to fall to its lowest level since 2012/13 to around 4.2 million tonnes.

“The dryness we have seen throughout the season, particularly the lack of in-crop rainfall, has significantly impacted yields,” he says, “and this could have a bearing on next season if rains are not received in coming months.”

Clack says despite the lower output, over three million metric tonnes of raw exports are still forecast in the current season, with Japan, South Korea and Indonesia remaining key markets for Australian sugar.

“In terms of the price outlook, global fundamentals are expected to see prices trade in the vicinity of $440/tonne in the first quarter of next year before rising to around $475/tonne by year end,” he said.