Sugar prices have been rising since last six months and are expected to remain firm in near to medium term which exposes food & beverage (F&B) companies to high price risk, said a Rabobank report released recently.
Rabobank’s Food and Agri business Research and Advisory, in a report titled ‘Hurry Cane: Managing Higher Sugar Prices in Asia’, said, “World raw sugar prices have risen by 30 per cent since mid-April, from 14.3 US cent per lb (pound) to 18.8 US cent per lb (basis July futures), as the market started factoring in potentially lower global sugar output in 2016-17. Domestic sugar prices across Asia have also started to reflect tighter fundamentals. Higher price trend is likely to persist over the next few quarters and will have substantial impact on Asian F&B corporate margins.” At present, global price for sugar futures is at 20.61 US cent per lb for benchmark futures contract no 11.
In fact, some of the Indian sugar companies and beverages and confectionery makers have discussed contractual arrangements for supply of sugar but that has begun in the last few months. Earlier, after the government liberalised the sugar release mechanism and partially decontrolled the sugar industry, this opportunity was made available but the sugar market entered a bear cycle in India and hence this contractual arrangement didn’t pick up in a big way. This was because in a falling market sugar was available and, with prices falling, keeping positions open was considered beneficial.
The Rabobank report says, “Asia to experience first sugar deficit in over five years. Sugar production in Asia is expected to be significantly lower in the 2016-2017 sugar season, as the 2015 El Nino-induced drought pulled output down to a five-year low. India, the world’s second largest producer of sugar, will witness a fall in production by 3.7 million tonnes due to consecutive droughts in 2014-15 and 2015-16 and will become a net sugar importer in 2016-17 (sugar season which begins in October). For 2015-2016, Rabobank is forecasting that Asia will witness its first sugar deficit year in over five years with an estimated deficit of 2 million tonnes. On a global level, while Europe and Brazil are forecast to see improved production next year, Rabobank is expecting a world sugar deficit of 5.5 million tonnes in the next sugar season.”
The report has said that soft drinks have been one of the most critical volume drivers for Asian sugar consumption. While predictions for soft drink consumption growth in Asia have been lowered, Rabobank projects growth to remain ahead of most other regions. Dairy – mainly condensed milk and ice cream – and confectionery are other key segments and expected to grow at a stable rate in the near future. For F&B segments with significant exposure to sweeteners, overall Asia growth was 8.5 per cent, versus the global growth of three per cent between 2006-2015. Despite the recent slowdown in the Chinese F&B market, Euromonitor predicts that 40 per cent of the global volume growth during 2015-18 will come from the Asian F&B market.
Despite being the largest sugar consumer, “India remains one of the fastest-growing markets for non-household sugar, with confectionery and soft drinks being the two key sectors driving consumption. However, as the largest consuming sectors, processed fruit-based products, confectionery and the traditional sweet-making industry will continue to drive absolute volume growth”.
The twin impact of sustained demand and lower 2015-16 production has pulled Asian sugar inventory to historic lows. Depending on local supply-demand gap, sugar prices in the region have increased by 30-50 per cent from levels seen in calender year 2015.
With subdued 2016-17 production expected and sustained growth in demand, Rabobank estimates that there is enough tailwind to support current levels till the fourth quarter of 2016, until there will be further information available on the 2016-17 sugar season’s supply-demand balance.
Further, the report said, “In India, domestic prices have risen quickly over the past six months, and if downstream users are slow to react, it could mean a ballooning in costs and a squeeze to profit margins.”
(Source – http://www.blackseagrain.net/novosti/egypt2019s-gasc-draws-offers-from-seven-suppliers-at-wheat-tender-1)