March 2013 Update: Supply Concerns Prompt Recovery in International Sugar Prices

ICE (Intercontinental Exchange) May futures rose by 4% during 19 February-14 March, reversing the declining trend registered on previous months. A standard refined sugar contract (112,000lb) was US$820 more expensive on 14 March than on 19 February. Despite this moderate recovery, it is important to remember that international sugar prices declined by 19% in 2012, according to data published by Euromonitor International’s Economic Observer.

2012: EU-27 sugar costs rise despite falling international prices

Despite the decline in international prices, the latest data published by the European Commission on EU-27 refined sugar market prices revealed an increase of 11% in 2012. EU-27 price rises have been driven by its quota system, which is currently set at 13 million tonnes. EU-27 refined sugar consumption was estimated by the industry at 16-16.5 million tonnes in 2012, which is significantly higher than the quota. This imbalance explains why EU-27 sugar market prices continued to grow in 2012, despite falling international prices. Sugar imports into the EU are discouraged through heavy import duties, a situation frequently denounced by global confectionery manufacturers.

ICE sugar futures for May delivery remained at historically low levels between 19 February and 6 March. Bulls (traders betting on higher prices) failed to regain any ground as news regarding favourable weather in Brazil underpinned further hopes of strong sugar output for the 2012/2013 season. Reports on the ground suggest that drier weather conditions were benefitting the pace of sugar cane planting in Brazil’s centre south, the main sugarcane growing region. Brazil accounts for around 50% of global sugar exports, and there is concern among exporters that a ‘bumper crop’ may drive international prices even lower. In Brazil, sales of Sugar and Sweeteners totalled 6.8 million tonnes in 2012.

Surprising recovery during second week of March

Sugar futures for delivery in May made a surprising recovery during 7-14 March, rising by 4%. The reason for this rise was twofold. Firstly, news on a possible tax break on sugar cane-based ethanol production in Brazil prompted fears about the potential diversion of sugar cane output from refined sugar to bio-fuel. Chicago May ethanol futures – used as a price benchmark by the industry – rose by 8% between 19 February and 14 March. A reduction in tax prices might increase the margin achieved by ethanol producers even further, which could, in turn, result in higher production of bio-fuel and a medium-term scarcity of refined sugar in export markets.

Secondly, slow transit in Brazilian ports during early March resulted in traders betting on potential disruptions in sugar supply. As many as 199 ships were waiting at Brazil’s main ports to load agricultural commodities like corn and soybeans on 8 March, according to date provided by SA Commodities and Unimar Agenciamentos Maritimos Ltda. The rise in sugar prices was, however, partially slowed by the rise in value of the US dollar recorded over the first half of March, which increased the cost of speculative investment.

Sugar buyers could achieve hedge against risk in May by going long (buying) on call options (right to buy) at US$0.17-0.18 per pound support levels (lowest price expected after latest retracement). Sugar buyers focusing on the cash market should be wary of spot price hikes during March-April given the current neutral outlook for prices over the second quarter of 2013.