Sugar Needing Deeper Shortages to Ensure Recovery in Prices

Aug 27, 2014 7:24 am ET

(Updates price in fifth paragraph.)

Aug. 27 (Bloomberg) -- Global sugar consumption needs to outstrip supply by at least 3 million metric tons to 4 million tons before prices recover significantly, according to the International Sugar Organization.

The world market will have a surplus of 1.3 million tons in the 12 months starting October, a fifth year of glut, and a small deficit in the following year, said Lindsay Jolly, the senior economist. The oversupply will be about 4 million tons this season, he said in an interview in Indonesia yesterday.

Futures have plunged more than 50 percent in New York from a three-decade high in 2011 as global harvests outpaced demand, boosting stockpiles that will reach a record 45.5 million tons at the end of September, according to the U.S. Department of Agriculture. Any potential price recovery because of output declines next season may be muted by huge stockpiles, the London-based ISO said in a report yesterday.

“Even with a deficit it won’t really mean much until you do get that statistical deficit translating into a physical deficit,” Jolly said at a conference in Yogyakarta. “I think you are going to need at least a 3 to 4 million ton deficit” for prices to move significantly, he said.

The contract for delivery in October rose 0.3 percent to 15.75 cents a pound on ICE Futures U.S. in New York today. Prices reached 36.08 cents in February 2011. Raw sugar may climb to 22 cents in 12 months as prices under 17 cents encourage buyers to build inventories, according to UBS AG.

Price Recovery

To expand the deficit and ensure a recovery in prices, supply declines will be needed from top exporters Brazil, Thailand and Australia, Jolly said. A stronger Brazilian real and higher gasoline prices in the world’s second-biggest ethanol producer may help spur shortages, he said.

Output in Brazil will probably drop to 37 million tons in the 12 months starting April from 37.5 million tons this year, Jolly said in a presentation. Production in Australia may increase to 4.6 million tons from 4.4 million tons, he said.

Demand may increase among importers such as Indonesia, set to be the world’s biggest buyer, Jolly said. The country may buy 3.6 million tons of raw sugar next year, he said. The Indonesian Sugar Refiners Association says processors may import 3.6 million tons in 2015, up 29 percent from this year.

Sugar consumption in Indonesia will potentially advance to 7 million tons in the next two or three years from 5.7 million tons this year, Jolly said. The U.S. Department of Agriculture estimates that usage will expand to 5.9 million tons in the 12 months to April, surging 66 percent in a decade.

World output will probably advance 0.6 percent to 183.8 million tons in 2014-2015 and consumption may rise 2.1 percent to 182.4 million tons, the ISO said yesterday. Import demand will probably fall 1.8 percent to 56.6 million tons, it said.