Fundamental supply and demand dynamics of the global sugar market mean sugar prices are set to rise, according to the latest sugar review from Czarnikow, the UK’s oldest sugar trader. 

This is despite the recent fall in prices, which were down in early October to trade 20 per cent below the August high of 26.25c/lb.
 
“There has been a lot of liquidation recently on the part of investors,” Toby Cohen, director of research at Czarnikow, says. “Some new investors bought the sugar story based on weather problems in India and were panicked out of their positions as prices fell on rumours that Indian demand could slow down.”
 
Raw sugar demand bounced back in Q2 09 to 7.5 million tonnes as importers returned to the market and has remained steady through Q3 09 at 7.2 million tonnes. Czarnikow currently estimates raw sugar demand in Q4 09 of 7.5 million tonnes, even if some Indian mills fail to buy sugar. It says Q4 09 demand could rise to over eight million tonnes.
 
On the supply side, Czarnikow says it is becoming increasingly clear that Brazil is not going to be able to support these levels of demand during the off-crop period, even though the industry has clearly tried to maximise sugar production and earnings this season.
 
“There simply will not be enough sugar to meet ongoing levels of demand.  With Brazilian production being held back by bad weather and no shortage of global demand, supply side problems will drive prices higher,” says Cohen.
 
By mid-August Brazilian sugar production was running almost three million tonnes ahead of the previous year though this has since fallen back to just 1.7 million tonnes. As Central South Brazil has already exported a further three million tonnes this season to the end of September, total availability for October onwards is unlikely to exceed seven million tonnes, allowing for domestic consumption.
 
India’s nine million tonne swing from a five million tonne exporter of sugar to a four million tonne importer in the past year has triggered a huge shift in the global sugar market as the supply balance is simply unable to accommodate or respond to a shift of this scale.
 
Cohen says: “Global raw sugar import demand fell in Q1 09 to 4.8 million tonnes as the world’s refiners ran down stocks while world prices rose. While it seemed prudent at the time to reduce asset exposure, with hindsight, this decision has exposed importers to much greater risk.”
 
Market sentiment has suffered in recent months, even leading to some suggestions that prices could be set to fall further and that the rally in sugar could now be over.
 
But crucially, while the sugar story has so far focused on the fall in Indian production and India’s need for imports, the next phase will focus on the fall in the Brazilian production outlook.
 
As a result, regardless of whether India buys or not, all importers are facing a shortfall in supply.
 
Cohen adds: “There is no question that the rise in prices was initially supported by Indian buying. But while Indian offtake has attracted all the attention, steady regular demand has gone largely unreported aside from the data on Brazilian export flows.
 
“With the Centre South of Brazil’s crop now coming to an end, hedging pressure and export availability is set to tighten sharply. Limits on supply require a forced adjustment of consumption. To this end it is clear that prices will need to move higher to ration demand.”


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