WORLD SUGAR
MARKET 5 YEAR
FORECAST
2021
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2| WORLD SUGAR MARKET 5 YEAR FORECAST
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Production shortfalls and price 3
Inflation reappears 4
India's ethanol boom 6
Reform of European sugar production 8
Sugar production is under pressure 9
Which producer can best respond to higher prices? 11
Could Brazilian cane crushing stop stagnating? 12
Conclusion 16
How to get access to live reports and data 17
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3 | WORLD SUGAR MARKET 5 YEAR FORECAST
PRODUCTION
SHORTFALLS
The past five years have seen significant changes in the sugar
market. So what’s to come in the next five years? In general, we
expect:
Increased ethanol production
World Trade Organisation rules reducing the
amount of subsidised Indian sugar supplied to the
rest of the world, making the world sugar market
more vulnerable to production shortfalls
Brazil and Thailand could be incentivised to expand
cane production if prices stay high
So what about the price?
Sugar prices could trade higher in the coming years because
of a potential shortfall. As India moves to supply less and less
sugar to the rest of the world, cane and beet will need to be
planted elsewhere to replace Indian supply. The risk is that
new supply cannot be grown quickly enough. Investment
would also be needed to create any new production capacity.
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4 | WORLD SUGAR MARKET 5 YEAR FORECAST
INFLATION
REAPPEARS
Since the low in prices seen in 2020, commodity prices have risen
sharply. This can be seen across a range of markets, from crude oil and
gasoline to lumber, sugar and grains to platinum and copper. And as
commodity prices rise, so does inflation. A recent example of this
occurred in Brazil, where inflation reached 5% for the first time in 4
years in February 2021. This means the Brazilian Central Bank has
started to raise interest rates aggressively, starting with a 0.75%
increase in March 2021.
The Brazilian IPCA inflation rate has broken above 5%
This isn’t unique to Brazil. US treasury yields have strengthened (and
the yield curve is steepening), signifying that investors believe that
further inflation could be coming.
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5 | WORLD SUGAR MARKET 5 YEAR FORECAST
Many commodity markets have faced a decade of
underinvestment in production, due to declining prices in the
2010s, and we are already seeing the effects of this as markets
seek to respond to the post COVID-19 lockdown boom in
demand. We haven’t seen a global shock of this scale since
World War II, which was followed by heavy investment in
infrastructure to rebuild destroyed parts of Europe and Asia.
While we are currently facing a different but equally drastic
set of challenges, we expect to see a similar move to
investment. In 2022 and beyond, it’s likely that investment
will prioritise food security and decarbonisation. These
factors could in turn lead to further demand growth and
investment flows into commodities, especially if rising yields
push global equity markets into a prolonged downturn.
Sugar is just a small part of this picture, as commodity
markets are generally dominated by energy and metals.
However, the versatility of sugar cane benefits energy
markets through production of ethanol, electricity and
biomass. As trends move towards green energy this is
particularly notable.
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6 | WORLD SUGAR MARKET 5 YEAR FORECAST
INDIA’S ETHANOL
BOOM
Using sugar cane to produce ethanol is not a new practice,
and the process has been dominated by Brazil since the
1970s. However, half a century later other countries are
cashing in on ethanol.
India is of particular interest here, as the Indian government is
aiming to reach a blend of 10% ethanol in gasoline by 2022,
and a 20% blend by 2025. This means that India, one of the
largest producers of sugar cane in the world, will have to
make rather dramatic shifts from sugar to ethanol production
to meet those ambitious targets. In 2017, the blend rate in
India was below 2% and pre COVID-19 gasoline demand was
growing at around 7% a year. So why the move to ethanol?
There are a few reasons. Firstly, domestic energy production
will increase, leading to increased energy security. It will also
lead to a reduced overall import bill and will reduce the
current surplus in sugar production. The government has
introduced incentives for cane mills to install new distillation
capacity in order to support this boom.
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India has produced surplus sugar in
8 of the last 11 years.
Historical Indian sugar production
For most of the past decade Indian mills have produced excess sugar,
which has led the government to subsidise sugar exports in order to
avoid domestic sugar stocks becoming unmanageably large.
This has been criticised by the rest of the world and the World
Trade Organisation won't allow subsidies to continue from 2023
onwards.
All of this points to 2022 being the final year of Indian sugar subsidies.
Once they are lifted, a large pressure on global sugar market prices will
disappear, meaning we anticipate prices will rise once more.
We saw a similar situation with European refined sugar in the mid
2000s, when the world market lost its source of low-priced, dependable
white sugar and poor production in 2010 and 2011 meant increased
demand in those years was not met. The world failed to meet increased
sugar demand in 2010 and 2011, causing a price jump to 36c/lb. While
not identical, the removal of subsidised Indian refined sugar may result
in a similar price increase.
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8 | WORLD SUGAR MARKET 5 YEAR FORECAST
OTHER ETHANOL
INITIATIVES
Outside of India, ethanol is also set to increase in the UK. At
the start of March 2021, the UK government announced it
was increasing the blend of ethanol in gasoline from 5% to
10% in September. Thailand has also moved to change its
dominant gasoline grade from E10 to E20 (a jump in ethanol
content of 10%). Elsewhere, China’s national rollout of E10
has been delayed, but it’s worth noting that China purchased
3 cargoes of US ethanol earlier in March 2021, with more set
to be traded as the US-China agricultural products deal is
agreed.
Rising ethanol demand around the world, combined with
higher global gasoline prices, could lead to stronger global
ethanol prices. This is relevant to sugar because it means
that mills in Centre-South (CS) Brazil would need better
returns on sugar to justify maximising sugar output over
ethanol.
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SUGAR CONSUMPTION
IS UNDER PRESSURE
While ethanol demand is rising, sugar consumption growth has been
poor for years. In fact, per capita sugar consumption has already
peaked in many countries.
Per capita sugar consumption has peaked in some countries
It’s difficult to see a way that this trend will reverse. Research released
in early 2021 has shown that being overweight or obese leads to worse
outcomes and complications from COVID-19. We suspect that pre-
existing regulations on foods deemed to be unhealthy will continue
longer term, as governments seek to promote healthier living. This
includes sugar, which has already been subject to taxation in many
countries even pre-COVID. Sugar taxes are likely to be adopted in an
increased number of countries in the future, and where they have
already been adopted it’s likely that their scope will widen.
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Sugar consumption vs population growth
Assuming global sugar consumption grows at 1.5% a year from 2022
onwards, this means that, by 2025, consumption will have reached
182m tonnes. Global sugar production peaked at 189m tonnes in
2017/18, when CS Brazil, India, Thailand and the EU all had stellar
crops. India’s sugar production decline means we need Brazil, Thailand
and the EU to perform once more.
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11 | WORLD SUGAR MARKET 5 YEAR FORECAST
WHICH PRODUCER
CAN BEST RESPOND
TO HIGHER PRICES?
Although global sugar prices have doubled in the past year,
we must remember that this doesn’t always reflect in
localised ‘home’ currencies. It’s par for the course that some
countries benefit while others do not.
Brazilian real depreciation means sugar export returns are
far above the cost of production (around 11c/lb) in respect to
the No.11 futures contract. Therefore mills have managed to
lock in excellent margins in 2020 and 2021 and are actively
looking to hedge sugar production in 2022 too.
By paying down or renegotiating debt obligations, the
Brazilian sugar industry has been able to deleverage.
Consolidation has been a key feature, exemplified by the
recent purchase of Biosev by Raizen, and mills are accessing
equity finance by listing on the BOVESPA stock exchange at
cane valuations that we haven’t seen in more than a decade.
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COULD BRAZILIAN CANE
CRUSHING STOP
STAGNATING?
Historical Brazilian cane crushing
As demonstrated above, cane crushing has not been able to
significantly increase for many years. The next step for the increasingly
healthy CS Brazilian cane sector would be to increase milling capacity,
in order to produce a larger crop.
However, we don’t expect to see this in the short term, or at least not
until the middle of 2023 at the earliest. The gap between India using
cane for ethanol and Brazil being able to process more cane into sugar
will be the opportunity for sugar prices to strengthen.
Thai and European sugar industries are smaller scale than the CS Brazil
industry, and they haven’t experienced the same price uplift as
Brazilian millers have so far.
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If the right price incentives are in place, Thai farmers would be able to
plant enough cane to exceed their previous record of 135 million
tonnes, set in 2017/18.
In 2022, we expect Thai farmers to harvest 100 million tonnes of cane,
so growth back to old highs will happen in 2023 at the earliest.
Thailand's Historical Cane Pricing
Processing this amount of cane would mean stretching the harvest into
the rainy season in April. Otherwise, there simply wouldn’t be the
ability to harvest fast enough. So if Thailand is to break new sugar
production records in the coming five years, we would need to see
further investment in harvesting speed and crushing capacity.
Thai Cane Production Should Rebound in 2021/22
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Again, this slow rebound in cane acreage means that there is an
opportunity for sugar prices to strengthen in the next two years.
Sadly there is a problem for both Brazil and Thailand: the time it takes
to plant and harvest new cane. It takes 12-18 months for cane to
mature, depending on the variety. Beet is more responsive, needing
about six months to mature for harvest. If given the right price signals,
beet farmers would be able to respond quickly to changing outlooks.
However, European beet prices paid to farmers sometimes lag behind
world market sugar returns. This is partly because of striking beet deals
in a rising market, as the price is out of date as soon as it is agreed. We
have also experienced a year of Euro strength which hasn’t helped this
situation. In addition, in some countries farmers are on three-year beet
contracts which reflect price expectations from 2019 or 2020, when the
sugar market was still in decline.
UK and EU beet acreage over time
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This means that we are currently seeing farmers abandon beet
growing, even as world market sugar prices are improving. Last year’s
battle with an outbreak of beet yellows virus, in France, the UK and
elsewhere, also seems to have sapped farmer enthusiasm for beet
growing.
The big question remains whether beet prices for the 2022 crop will be
high enough to draw farmers back to beet, which would lead to an
increase in acreage. Perhaps fresh European refined export availability
in late 2022 will be the first new significant supply for the world market
in response to higher prices.
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16 | WORLD SUGAR MARKET 5 YEAR FORECAST
CONCLUSION
The period where the market is most at risk of a supply
shock is 2022-2023, when Indian subsidised sugar exports
should finally cease. Production shortfalls elsewhere during
this time might lead to increased demand for sugar which
major suppliers won’t be able to respond to, driving prices
higher.
Further forward, new sugar supply could appear from 2023
onwards which may bring the world market into balance.
But given the possibility of continued weather disruption in
the course of the next five years, as well as the possibility of
further sucrose usage for energy, we have decided to retain
strong forward price guidance.
Written by Stephen Geldart
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