LONDON (Commodity Online): Sugar prices in 2011 were extremely volatile, and we expect them to remain choppy through 2012 as well, but with less risk to the upside compared to year ago levels, said Barclays Capital in a research note.
As ever, evolving supply-side estimates have been, and are likely to remain, key to price moves. Global production is estimated to expand further in 2011-12 on higher output in India, the EU, Russia and Thailand. Notably, however, Brazil – the world’s largest sugar producer – is slated to post its first y/y decline in sugarcane production in a decade, due to ageing cane, poor weather and low sucrose levels. Barclays forecast Brazilian production to reach only 35.8mn tonnes in 2011-12, a decline of 5.8% y/y.
According to Barclays, a key influence of the market outlook in 2012 will be how the price of ethanol influences Brazilian mills’ decisions whether to allocate cane to sugar or ethanol production. The end of the US government subsidies and trade barriers to Brazilian ethanol bodes well for Brazilian ethanol producers in the long term and could prompt renewed investment but exports are unlikely to increase in the near term due to Brazil struggling to meet its domestic demand. Barclays estimates global 2011-12 sugar production will grow by 4.2% y/y, due to larger-than-expected crops in Europe, as well as in key producers Australia, India and Thailand, as favourable weather and prices have led to farmers to boost plantings and will offset the decline in Brazil.
India – the world’s largest consumer and second largest producer – has continued for a second year to post a recovery after 2008-09 and 2009-10’s low production due to weak monsoon rains and cyclical production issues. Attractive prices along with expanded acreage augur well for higher supply and production prospects for 2011-12 and also into 2012-13.
So far, the Indian government has allowed 1mn tonnes of sugar exports in the 2011-12 season. A ministerial panel is due to meet in early next week to consider allowing further exports and Barclays anticipates the go-ahead for further exports.
“While demand trends look positive, we see limited upside in prices on comfortable production estimates. Better crops and a fall in prices should help release latent demand after it slowed markedly during the recent period of high prices and tight supply. We expect a 2.1% y/y rise in 2011-12 global demand, with growth led by China and India, driven by demographics and economic growth,” Barclays added.
Further, China continues to face a domestic shortfall from domestic reserves after a second year of disappointing sugar harvests led to large releases from its reserve stocks in 2010-11 and greater reliance on imports. China’s net sugar imports in 2011 came in at 2.92mn tonnes, up 65% y/y, and remain elevated historically. Meanwhile, China’s State Council has recently approved a plan to stockpile 1.5mn tonnes of sugar.
Despite lower Brazilian production, the move to a larger global market surplus of 5.4mn tonnes in 2011-12, along with an increase of India’s exportable surplus and strong production prospects in key Northern Hemisphere producers, will limit upside on prices. Important questions for the sugar market in 2012 will be whether cane output in Brazil recovers after a production setback, when and how much Brazilian cane will be converted into ethanol instead of sugar, and the outlook for Indian exports.
“We currently forecast prices to average 22.4 cents/lb in H1 12 and 23.85 cents/lb in H2 12,” Barclays concluded.
