abare.gov.au - Australian commodities – September quarter . volume 15 . number 3 2008

Sugar

Max Foster

Stronger world sugar prices in 2008-09

The world indicator price for sugar (Intercontinental Commodities Exchange no. 11 spot, fob Caribbean) is forecast to average US13.7 cents a pound in 2008-09, up from US13.5 cents a pound in the previous year, because of a tightening of the world sugar market situation. The indicator price has been very volatile in 2008, reaching US16.7 cents a pound in early March 2008, then declining to US11.5 cents a pound in May 2008, before once again exceeding US16 cents a pound in late August 2008. The indicator price in mid-September 2008 was US14.5 cents a pound.

As well as movements in world prices, returns for Australian sugar in 2008-09 will reflect forward selling, long-term contracts and preferential access to higher priced markets, such as the United States which is protected by a tariff quota. In early September 2008, Queensland Sugar Limited (the main sugar marketer in Australia, despite losing its single desk marketing status in 2006) was indicating a seasonal pool price to sugar millers for raw sugar in the range $305–325 a tonne IPS (International Pol Scale). This is around $40 a tonne higher than the discretionary pool price in 2007-08 and reflects both higher world sugar prices and a much weaker Australian dollar.

Sharp decline in world sugar production in 2008-09

World production of sugar is forecast to decline to 164 million tonnes in 2008-09, down 5 million tonnes from the record 169 million tonnes produced in 2007-08. Sugar production in 2008-09 is likely to be higher in only Brazil and a handful of minor producing countries, with sizable declines forecast for India and the European Union. Important factors in the shift away from sugar production are higher returns from alternative crops, particularly cereals and oilseeds, and increased production of ethanol from sugar cane, particularly in Brazil.

In Brazil, production of sugar cane is forecast to grow by 14 per cent in 2008-09, despite periods of unfavourable weather which have delayed the progress of the harvest. However, sugar production is forecast to increase by less than 2 million tonnes or 5 per cent, because an increasing proportion of Brazil’s sugar cane is being diverted to ethanol production. In the first few months of Brazil’s 2008-09 harvesting season (starting in May 2008), around 60 per cent of sugar cane production was being used for ethanol production, compared with 54 per cent in 2007-08. For 2008-09 as a whole, the proportion of sugar cane production for ethanol is forecast to average around 58 per cent.

Production of sugar from sugar beet in the European Union is forecast to fall to 16 million tonnes in 2008-09, down from 17.7 million tonnes in the previous year. The main cause of this decline is renunciations of quotas for sugar beet production, brought about by incentives provided under the reform arrangements for the European Union’s Common Agricultural Policy. By late August 2008, quota renunciations were just short of the target of 6 million tonnes.

Higher returns from alternative crops are likely to see Indian sugar production plunging more than 4 million tonnes in 2008-09.

In the United States, sugar production from sugar beet is forecast to fall by 0.4 million tonnes in 2008-09, while sugar from cane production is forecast to increase by 0.1 million tonnes. Sugar beet varieties that are genetically modified to be herbicide tolerant are being grown commercially for the first time in the United States in 2008-09 and are estimated to make up around half of total US sugar beet plantings.

Harvesting of the Australian sugar cane crop commenced in July 2008. The area of sugar cane harvested in Australia in 2008-09 is likely to be 3 per cent less than in the previous year. Seasonal conditions to date suggest sugar yields in 2008-09 will be slightly higher than in 2007-08. Australian raw sugar production in 2008-09 is forecast to be 4.9 million tonnes, 0.1 million tonnes higher than in 2007-08.

Ethanol prices an increasingly important influence on world sugar supplies

The ethanol price is an increasingly important determinant of the world supply of sugar because its relationship to sugar prices influences how much sugar cane is diverted to ethanol production rather than sugar production. At this stage it is largely only in Brazil and Thailand that ethanol is being produced directly from sugar cane. In other countries, such as Australia and India, ethanol is mainly produced from molasses, a byproduct of the sugar refining process.

Domestic prices for ethanol in Brazil are not perfectly tied to world oil prices. This is because policies in Brazil, such as minimum ethanol blend requirements in passenger vehicle fuels (currently set at 25 per cent), can influence domestic ethanol prices. However, with Brazilian ethanol exports jumping sharply to around 15 per cent of domestic ethanol production since 2004, Brazilian ethanol prices in recent years appear to have been more closely related to movements in world oil prices.

In August 2008, CSR Limited announced plans to convert its ethanol distillery at Sarina in Queensland from producing 38 million litres of fuel grade ethanol and 22 million litres of industrial/beverage grade ethanol, to producing 60 million litres of fuel grade ethanol. This conversion is aimed at meeting growing domestic demand for ethanol blended fuel that, according to CSR Limited, has increased by 500 per cent over the past three years. Australian imports of undenatured ethanol in 2007-08 were 25 million litres (in alcohol equivalent terms), up from an average 5 million litres a year in the previous three years. This included imports of 5.4 million litres from Brazil at an average landed price of 59 cents a litre.

Sugar outlook

2006-07

2007-08

2008-09

% change

World

Production

162.6

169.0

164.1

– 2.9

– Brazil

31.6

33.2

5.1

Consumption

156.9

160.5

163.7

2.0

Closing stocks

64.5

73.0

73.3

0.4

Change in stocks

9.0

8.5

0.3

Price

USc/lb

11.7

13.5

13.7

1.5

Australia

Area

’000 ha

409

403

390

– 3.2

Production

5 026

4 763

4 907

3.0

Exports

3 714

3 570

3 630

1.7

– value

A$m

1 510

956

1 003

4.9

f ABARE forecast. s ABARE estimate.

Steady demand growth in 2008-09

The demand for sugar cane and sugar beet is related to demand for food sugar and for ethanol.

Ethanol demand is being boosted by high oil prices and various policies throughout the world aimed at encouraging the use of biofuels, such as ethanol and biodiesel. In Brazil, the introduction of flexible fuel vehicles since 2003, which can run on fuel blends ranging from pure ethanol to pure petrol, is a development boosting demand for the ethanol produced from sugar cane in that country. Since their introduction, nearly 6 million flex-fuel passenger and light commercial vehicles have been sold, representing 45 per cent of total sales in this category.

Food sugar demand is continuing to grow strongly because of rapidly rising consumer incomes, particularly in economies like China and India. Although higher prices are expected to have a dampening effect on demand, world food sugar consumption is still forecast to grow by 2 per cent in 2008-09.

World sugar supply and demand reasonably balanced in
2008-09

Current expectations for sugar production and consumption in world markets suggest world sugar stocks are likely to increase by around 0.3 million tonnes in 2008-09. This follows a period in which production was considerably in excess of use resulting in a relatively high world stocks to use ratio at the beginning of 2008-09. The high world stocks carried into 2008-09 are expected to be a factor limiting the extent of sugar price increases this year.