Robin Shaw, Managing Director of London-based Marex Spectron syas thta India is a leading candidate to achieve rising global sugar demand.
According to industry experts and analysts, sugar prices in the global market will likely hold up next year after rallying nearly 30% this year, with the weather playing a key role in the firm price trend.
With crude oil prices threatening to top $100 per barrel and ethanol playing an important role in the convergence of energy prices, they said during a webinar hosted by the All India Sugar Traders Association titled ‘Global Sugar: Brazil Loss-Will India Fill the Gap?’
‘Sugar prices will hold up in 2022, and the weather may aid the bull market’s continuation. Speculators believe the market is bullish, but not yet. This is because demand was weak in the first half of this year,’ explained Robin Shaw, Managing Director of London-based Marex Spectron, which trades energy and other commodities.
Because prices were so low last year, many countries and businesses purchased more sugar. ‘They are now consuming the stocks purchased last year in 2021. This will result in a resurgence of demand in 2022. However, the freight market is a horrendous negative demand factor,’ Shaw pointed out.
Brazil, Australia, and Thailand have grown tired of producing sugar. Brazil has reached peak production, and the pipelines will be completely depleted over the next two years, leaving no room for additional sugar.
Reasons for the shortfall
Every year, the world requires two million tonnes (mt) of additional sugar to meet rising demand from a growing population. ‘The world market requires a new major structural exporter, and India is an excellent candidate,’ he said.
According to the Marex Spectron official, there are four reasons for the current global sugar deficit. One reason was that rising energy prices pushed ethanol parity rates higher, requiring sugar prices to rise by 100-200 points above ethanol.
‘The second reason is that sugar output in Brazil will be low again next year. Production fell from 38.5 mt two years ago to 32 mt this year. Because of the drought, three frosts, and fire that ravaged dry sugarcane fields this year, the yield will be lower than ideal next year. As a result, it will be lower than usual,’ Shaw explained.
Extreme weather conditions were the third reason, and demand recovery from the pandemic’s low point was the fourth. In Thailand, even a bearish cassava market has risen, and good rice production has hampered Thailand’s sugar production.
There are three variations
Three parities would support sugar prices: ethanol, Indian exports, and Chinese imports. ‘China imported massive amounts of sugar two years ago. It has depleted all of its stocks and will need to import. As a result, its import prices must rise in line with the global market. ‘All of these factors must work flawlessly for supply next year,’ he said.
However, after a couple of good years, prices are bound to fall. As the sugar price cycle of good years followed by a few bad years continues, nations resort to producer protection via import duties. ‘Sugar is governments favorite industry, but it generates surpluses that have a double negative impact, pushing global prices lower,’ Shaw says.
Farmers should be made aware of the global market situation and plan their sugarcane cultivation accordingly. There should be a clear solution in place so that when a surplus occurs, a mechanism to get rid of it can be developed.
‘Indian industry is fortunate’
In reference to the Indian situation, he stated that the Indian industry was fortunate in that its government was taking good care of it. ‘When global prices rose, the Indian sugar sector received a second wind. However, it is time for the industry to consider what kind of mechanism is required to manage the situation in place of the government,’ Shaw said.
Quotas for producers, freedom to expand, plans to get rid of surplus production, and ensuring price benefits are extended to stakeholders producing excess sugar are all required components of the mechanism.
India could consider expanding the area under cultivation for sugar and establishing a single export agency. It should also plan ahead of time for a ‘sensible’ system that will share the burden of export, according to Shaw.
New cane varieties have been introduced in the state of Uttar Pradesh
According to Jean Luc Bohbot, Chief Executive Officer (CEO) of Wilmar Sugar, sugar production in India is increasing primarily due to growers in Uttar Pradesh cultivating new varieties.
Carbon dioxide emissions, on the other hand, were increasing at a rate of 4% per year. ‘Pollution is a health concern that costs $12 billion per year, with coal accounting for 50% of power generation. A doubling of fleet strength would result in a doubling of carbon dioxide emissions. ‘Increased use of ethanol in the fuel mix could be one solution for India,’ he said.
Ethanol could account for 27% of fuel consumption in India, similar to how green energy accounts for 80% of total energy generation in Brazil. He claimed that increasing ethanol production would result in billions of dollars in savings in India, as well as higher prices than sugar conversion.
Further Bohbot said, ‘Investment in competitive distilleries is the only way to increase ethanol production. India, in order produce five billion liters of ethanol, requires a $3 billion investment which can be increased to eight billion liters.’
Energy prices were higher, and the possibility of crude oil prices exceeding $100 per barrel was real. As a result of China importing massive amounts of corn and soyabean, commodity prices would rise. According to the Wilmar sugar official, ‘Indonesia, Vietnam, Pakistan, and Egypt may import more food.’
He claimed that under good agricultural practices, the best lands were being used to produce the best crop and that new lands that could be added to increase output would be less productive. With the world vulnerable to ‘volatile climate change,’ any crop surprise was causing market volatility and resulting in frequent price shocks.
Centre of change
However, sugar was at the center of the change, where ethanol will play a key role in energy price convergence because ethanol production is expected to increase as the arbitrage was in its favor.
‘Brazil will play a significant role, and India can follow Brazil’s lead,’ Bohbot mentioned, referring to the Latin American country’s plan to tax exports.
According to Karim Salamon, sugar analysis head at Wilmar Sugar, Brazil crushes two-thirds of its cane for ethanol production. Its prices were slightly higher than sugar’s, at more than 20 US cents per pound, and the Brazilian Real’s weakness aided the rise in sugar prices.
‘If sugar prices rise in tandem with crude, Brazil will be able to export more sugar. Sugar is bullish this year, but ethanol stocks are tight, which complicates things (on the supply front),’ he said.