Out of the depths as sugar prices point higher

As Australian cane growers gear up for this year’s harvest, there are signs the market is starting to turn – for the better – with the erosion of burdensome global stocks, according to Rabobank’s sugar analyst Charles Clack.

In the Burdekin to present at the bank’s Sugar Update event last week, Mr Clack told growers there is “light at the end of the woods”, as global stocks are poised to come back into balance in 2019/20, in line with the five-year average.

“This doesn’t mean we will see a strong jump in sugar prices,” he said, “but with the global sugar market set to run up a deficit next season – as consumption exceeds production – there is certainly some upside to the price outlook. And we are forecasting domestic prices to reach around $450 per tonne by the end of this year.”

Mr Clack said Rabobank’s just-released Sugar Quarterly, is projecting a 4.2 million tonne deficit in 2019/20, which comes off the back of this season’s small surplus, anticipated to be in the vicinity of 0.6 million tonnes.

“This signifies a huge rundown in stocks, from the nine million tonne surplus in 2017/18,” he said. “While global stocks will continue to weigh heavily on the market for a few more months yet, the market will start to come back into balance as we approach the end of the year.”

With expectations of a reduction in sugar output in Thailand and the EU, Mr Clack said Indian production is also expected to be down after the past two near-record harvests.

“Indian production is pegged to come in around 31.8 million tonnes, raw value, in 2019/20 as dry weather threatens output – representing a drop of around three million tonnes from current levels,” he said.

“But the biggest swing factor, in terms of production, will be Brazil and whether they switch cane, earmarked for ethanol production, to sugar. This ‘switch’ depends on the sugar price compared to ethanol – and while this price arbitrage is narrowing – it still currently favours ethanol.”

If the sugar price was to rise sharply, however, Mr Clack said, this would result in a switch towards sugar, and this dynamic would be likely to keep a lid on sugar prices for the next couple of months.

“As the Brazilian harvest progresses, their mills capacity to react to a rising sugar price will steadily diminish, so by the end of the year we expect fundamentals to push the international price to around 13.6USc/lb, from 12.5USc/lb currently,” he said. “The domestic price exhibits stronger upside potential, however, with the lower Australian dollar and domestic prices expected to head up towards AUD 450/t by Q4 2019, from AUD400/t currently.”

Mr Clack said despite the positive trajectory for prices, there are some watch factors that could change the outlook. He urged growers to keep an eye on developments in India and its export program, and in the longer-term, slowing global consumption growth in face of sweeteners.

“Australia and Brazil have both commenced formal proceedings with the World Trade Organisation over India’s sugar subsidies and allegations of dumping sugar onto the world export market,” he said, “but this process is bound to take time and, as yet, no action has been taken.

“Quota removal and market liberalisation in sugar-producing nations, such as the EU and Thailand, is forecast to wind back output as these nations become more exposed to global markets and low prices. And it will be interesting to see what eventuates in India, if financial support to cane growers is removed.”

In terms of global sugar consumption, Mr Clack said growth was now stagnant in large parts of the developed world – but growth prospects were still positive in emerging economies, with South Korea and Indonesia remaining key destinations for Australian sugar.

“While we should be concerned by the surge in the use of sweeteners, and the impact this could have on sugar consumption, there are still strong growth prospects in developing economies in terms of their population size and per capita consumption,” he said. “And with Australia located close to these markets, there are certainly some market opportunities there.

“That said, we can’t rely on growth in consumption to drive upside in markets going forward.”

The Sugar Update, held at the Lando family property near Ayr, also featured Andy Duff Rabobank’s São Paulo-based global sugar strategist, via webinar, who provided insights into the Brazilian sugar market and how producers there are faring.

Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 38 countries, servicing the needs of approximately 8.4 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 93 branches throughout Australia and New Zealand. Rabobank was named ‘Australia’s Most Recommended Agribusiness Bank’ at the 2019 DBM Australian Financial Awards.

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Rabobank Australia & New Zealand 
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Skye Ward
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Rabobank Australia
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