abare.gov.au - Australian commodities – December quarter . volume 15 . number 4 2008

Sugar

Max Foster

World sugar prices to ease in 2008-09

The world indicator price for sugar (International Commodities Exchange, no. 11 spot, fob Caribbean) has been volatile in 2008, peaking at US16.7 cents a pound in early March and falling to US11.6 cents a pound in mid-November. In early December 2008, the sugar indicator price was around US12.6 cents a pound.

World sugar prices in 2008-09 are likely to be supported by lower world sugar production. Because world demand for sugar is less responsive to changes in income than many other commodities, sugar demand is not likely to be as adversely affected by the global financial crisis as most other commodities. Consequently the world sugar indicator price is forecast to average US13 cents a pound in 2008-09, down only US0.7 cents a pound compared with 2007-08.

The recent sharp depreciation of the Australian dollar against the US dollar has resulted in very strong prices for sugar in Australian dollar terms. The bulk of Australian raw sugar is sold through Queensland Sugar Limited, which was the single desk marketer of Queensland sugar until 2005. Indications are that the return from Queensland Sugar Limited’s 2008-09 seasonal pool will be in the range $323 to $333 a tonne International Pol Scale (IPS), up from $275 a tonne in 2007-08.

World sugar production lower in 2008-09

World production of sugar in 2008-09 is forecast to be 162.6 million tonnes, down 6 million tonnes compared with 2007-08. The decline is mainly because of lower production in the European Union and India, only partially offset by higher production in Brazil.

In Brazil, sugar cane production in 2008-09 is forecast to increase by 17 per cent compared with 2007-08. However, the proportion of this cane production going to ethanol production is forecast to increase to 57 per cent, compared with 54 per cent in 2007-08. This means that Brazil sugar production is forecast to increase by around 11 per cent in 2008-09 to 34.8 million tonnes.

In the European Union, sugar production is forecast to decline by 2.5 million tonnes in 2008-09. The decline is a result of reforms to the Common Agricultural Policy that have seen the renunciation of production quota entitlements of nearly 6 million tonnes.

In India, sugar production in 2008-09 is forecast to be 5.6 million tonnes lower than 2007-08. This reflects a shift out of sugar production because of low returns compared to alternative crops.

Brazilian ethanol production a key factor in 2008-09

Given the importance of Brazil as a sugar producer, the price switch point between sugar and ethanol production in Brazil will be a key determinant of world sugar prices in 2008-09. As the Brazilian ethanol industry has become more export oriented in the 2000s, Brazilian ethanol prices have more closely followed world oil prices.

Ethanol prices in Brazil have declined in recent months, broadly in line with the sharp decline in world oil prices. This has reduced the incentive to use sugar cane to produce ethanol. However, a requirement in Brazil to use at least 25 per cent ethanol in fuel blends in passenger and light commercial vehicles will limit the extent to which Brazilian ethanol prices will decline further in 2008-09.

Sugar outlook

2006-07

2007-08

2008-09

% change

World

Production

166.1

168.6

162.6

– 3.6

– Brazil

31.6

31.4

34.8

10.8

Consumption

156.9

162.1

165.6

2.2

Closing stocks

64.4

69.3

66.3

– 4.3

Change in stocks

8.9

4.9

– 3.0

Price

USc/lb

11.7

13.7

13.0

– 5.1

Australia

Area

’000 ha

409

403

390

– 3.2

Production

5 026

4 763

4 568

– 4.1

Exports

3 719

3 416

3 337

– 2.3

– value

A$m

1 504

966

1 141

18.1

f ABARE forecast.

Steady sugar demand growth in 2008-09

Compared with many other commodities, demand for sugar is relatively unresponsive to changes in consumer incomes, so any downturn in the world economy will have only a small impact on demand. World consumption of sugar in 2008-09 is forecast to increase by 2.2 per cent. This compares with the average rate of world sugar consumption growth of around 2.7 per cent over the 10 years to 2007-08.

With production shortfalls in key sugar consuming countries, world sugar imports in 2008-09 are forecast to increase by 2 million tonnes, to 47.8 million tonnes. The increase in imports is mainly because of the European Union (imports up 1 million tonnes) and India (up 0.8 million tonnes). Record sugar production in China is forecast to result in a reduction of 0.5 million tonnes in Chinese sugar imports in 2008-09.

Lower expected production in India has meant that the transport subsidy for sugar exports provided by the Indian Government in 2007-08 has not been extended into 2008-09, though other forms of subsidy remain. Without the transport subsidy, Indian sugar exports in 2008-09 are likely to fall to less than 1 million tonnes, compared with 4.4 million in 2007-08.

World sugar stocks to decline in 2008-09

The decline in world sugar production and relatively steady growth in sugar demand implies a significant decline in world sugar stocks in 2008-09. World carryover stocks of sugar in 2008-09 are forecast to decline by 3 million tonnes compared with 2007-08. This decline follows two years of substantial buildups in world stocks, so the world stocks to consumption ratio in 2008-09 will still be at a relatively high level in historical terms.

Much of the stock decline in 2008-09 is likely to occur in India, because of its domestic production shortfall. In July 2008, the Indian Government approved sales of 2 million tonnes from its buffer stocks to contain increases in domestic sugar prices.

Australian sugar production lower in 2008-09

The 2008-09 Australian cane crush is largely completed, with Australian sugar cane production in 2008-09 estimated to be down 7 per cent compared with 2007-08. The decline is because of a 3 per cent reduction in plantings, and seasonal and disease (sugar cane smut) factors that have affected cane yields.

Australian cane production has declined in each of the past four years. A range of factors have contributed to this decline, including poor prices at various times; drought; cyclones; sugar cane smut; urban encroachment; increased use of rotation crops (mainly soybeans and peanuts); and higher returns from production alternatives, particularly forestry. Sugar production in the Ord River area also ceased in November 2007.

The commercial cane sugar (CSS) content of 2008-09 cane production is up compared with 2007-08. Australian raw sugar production in 2008-09 is forecast to be 4.57 million tonnes compared with 4.76 million tonnes in 2007-08.

Despite the forecast decline in world prices, the assumed depreciation of the Australian dollar is expected to boost returns to Australian cane growers. The average price paid to Australian canegrowers for their sugar cane is forecast to rise to $28.20 a tonne in 2008-09, nearly $3 a tonne higher than in 2007-08.