abare.gov.au - Australian commodities – June quarter . volume 15 . number 2 2008

Sugar

Modest decline forecast for sugar prices in 2008-09

The world indicator price for sugar (Intercontinental Commodities Exchange no. 11 spot, fob Caribbean) is forecast to decline to US12.1 cents a pound in 2008-09, down from US12.8 cents a pound in the previous year, under the expected influence of further buildup in world sugar stocks. The indicator price increased sharply in early 2008, to reach US16.7 cents per pound but then declined to around US13 cents a pound in mid-June 2008. However, current forecast prices for 2008-09 are still relatively favourable in historical terms.

World sugar production and consumption in 2008-09 are expected to be more evenly balanced than in 2007-08, despite a 16 per cent increase in sugar cane production in Brazil in 2008-09. This closer balance reflects an increasing proportion of Brazilian sugar cane expected to be diverted to ethanol production, rather than sugar production. A number of major sugar producing countries are also expected to produce less sugar in 2008-09.

World sugar production to decline in 2008-09

World production of sugar is forecast to decline to 165.5 million tonnes in 2008-09, after increasing sharply to a record 169 million tonnes in 2007-08. Higher sugar production in Brazil, Australia and China is forecast to be more than offset by lower sugar production in the rest of the world, particularly in the European Union and India.

Brazilian sugar cane production is forecast to increase by 16 per cent in 2008-09. However, high world oil prices, favourable incentives for the use of ethanol as fuel and a rapidly increasing fleet of flexi fuel cars in Brazil, mean the proportion of the cane harvest going to ethanol production is forecast to increase to 57 per cent in 2008-09, compared with 53 per cent in 2007-08. This implies an increase in Brazilian sugar production of only 2.1 million tonnes in 2008-09.

Thailand is also forecast to increase sugar cane production in 2008-09, boosted by government policies aimed at expanding the industry. However, Thai sugar production could decline by up to 500 000 tonnes in 2008-09 if targets are met using sugar cane for ethanol production.

Production of sugar from sugar beet in the European Union is forecast to fall to 15.6 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 for sugar. The level of quota renunciations had reached 5.65 million tonnes in May 2008, just short of the target 6 million tonnes.

Lower sugar production is also expected in the Russian Federation and the Ukraine in 2008-09, because of relatively favourable returns to grains and some redirection in government policies arising from relatively abundant supplies of sugar.

Indian sugar production is forecast to decline by 11 per cent, in 2008-09. This results from widespread payment delays to sugar growers with the 2007-08 crop and higher returns for alternative crops, particularly rice, wheat, corn and pulses. The forecast decline also reflects expected drop-offs in sugar yields related to the planting cycle for Indian cane production.

Pakistan sugar production is forecast to decline by 12 per cent in 2008-09, because of low returns to cane growers, despite government efforts to meet a widening domestic shortfall in sugar production.

In the United States, sugar production from sugar beet is forecast to fall by 0.3 million tonnes in 2008-09, while sugar from cane production is forecast to remain at the 2007-08 level. Sugar beet that is genetically modified to be herbicide tolerant will be grown commercially in the United States in 2008 for the first time, following approval for food use in key world markets.

Australian plantings of sugar cane are estimated to be down by 0.5 per cent in 2008-09. However, reasonably favourable conditions have prevailed in most growing regions since early 2008, raising the possibility that Australian sugar production in 2008-09 will be around the same level as 2007-08.

Sugar outlook

2006

2007

2008-09

% change

World

Production

162.6

169.0

165.5

– 2.1

– Brazil

32.4

34.5

6.5

Consumption

155.3

157.0

159.9

1.8

Closing stocks

67.4

79.3

85.0

7.2

Change in stocks

9.9

10.1

5.7

Price

USc/lb

11.7

12.8

12.1

– 5.5

Australia

Area

’000 ha

409

397

395

– 0.5

Production

4 722

4 961

4 965

0.1

Exports

3 714

3 683

3 707

0.7

– value

A$m

1 510

975

988

1.3

f ABARE forecast. s ABARE estimate.

Demand growth assured in 2008-09

The demand for sugar cane and sugar beet is being boosted by high oil prices and various policies throughout the world to encourage using renewable fuels. Ethanol is produced from sugar cane, sugar beet or molasses (a by-product of sugar processing).

Food sugar demand is continuing to grow strongly because of rapidly rising consumer incomes, particularly in emerging economies like China and India. World sugar consumption is forecast to grow by 1.8 per cent in 2008-09.

Rising world food prices have prompted calls to lower incentives for ethanol production in countries including the United States and the European Union. Should this happens, the effect on the world demand for sugar cane and sugar beet for ethanol production would probably be slight in 2008-09.

Smaller buildup in world sugar carry-over stocks in 2008-09

The forecast balance between sugar production and consumption in 2008-09 suggests a smaller buildup of world sugar carry-over stocks in 2008-09 than occurred in the previous two years.