Global sugar surplus could incent additional ethanol production

By Rabobank | June 27, 2013

The global sugar market has been maintaining its downtrend over the last few months, according to a new report from Rabobank. NY No. 11 prices reached USc 16.21/lb in mid-June, a level not seen for three years. Projections for most of the key producing countries are heading towards meeting, or exceeding, expectations for the 2012/13 international crop year, and the current supply/demand balance features the largest surplus in the last 15 years. Rabobank’s preliminary projections for 2013/14 point to a fourth year of surplus, estimated to be around 3.7 million metric of sugar, suggesting no near-term respite for international sugar prices.

“As the 2012/13 international crop year enters its last quarter, international sugar prices should be increasingly driven by the sentiment and perspectives for the 2013/14 season. Although the estimated 3.7 million tonne sugar surplus is far from the 12 million tonne surplus projected for 2012/13, it nevertheless implies a further rise in global stock levels and no decline in the global stocks/consumption ratio,” said Andy Duff, a Rabobank analyst.

According to Rabobank, Northern Hemisphere prospects are weighing on prices. Whereas a large harvest in Brazil´s Centre/South is already likely to be priced into today’s sugar market, it is only recently that Northern Hemisphere producers have started to disclose projections for their 2013/14 crops. With only modest declines forecast for India and China, and a possible increase in output suggested for Thailand, the preliminary outlook for several of the Northern Hemisphere’s Asian heavyweights suggests no prospect of substantial reductions in sugar output.

Meanwhile, the recent strengthening of the US dollar is likely to reduce dollar-denominated commodity prices across the board. The weakening of the Brazilian real versus the U.S. dollar also affects the attractiveness of ethanol in relation to sugar, lowering the level of the world sugar price to a point at which millers begin favoring ethanol over sugar production. In the short term at least, a weaker real has made sugar production more attractive than ethanol, which could have knock-on consequences for the percentage of cane that Brazilian millers allocate to sugar and ethanol respectively.

“Given the dramatic weakening of the real in recent weeks, the impact of turbulence in the currency markets on sugar prices will be particularly important in the immediate days and weeks head,” added Duff.