From Projected Deficit to Record Surplus
In October of 2014, the world’s five year sugar surplus looked to be in danger. Unprecedented drought conditions in Brazil—the world’s largest producer of sugar—were projected to reduce the country’s total yield of cane by 10%. In response, the price climbed to 17.12 cents per pound, as investors prepared for the impending shortage.
But the shortage never came. And while continued environmental factors still threaten to compromise the global sugar supply, a deficit doesn’t appear to be in the cards.
Here’s why: The world has more sugar than it knows what to do with. The end of 2014 saw crop yields in India and Thailand boosted by above average rainfall, and by September 2015 India is expected to produce its largest sugar harvest in three years. Projections have global sugar stockpiles hitting 80 million tons by the end of 2015, fueled by an 620,000 metric ton surplus. This record output—combined with the Brazilian Real trading at a 12-year low—has driven sugar contracts for future delivery to a six-year flat. The price of Sugar #11 (a number given to reference the way shipping costs are handled between the buyer and seller) for future contracts for delivery in October of 2017 have fallen 25% since the beginning of 2014 alone.
While the sugar surplus will continue to persist into 2015, several factors may disrupt the stability of its supply by the end of the decade. Despite individual countries posting record crop yields in 2014, the overall production of sugar globally has steadily declined since 2012. At the same time, international demand continues to rise on the backs of global population growth and record sugar consumption by the EU and India.
To add to the mix, The European Union is set to abolish sugar beet quotas by 2017, a change projected by the EU’s Joint Research Centre (JRC) to cause prices to drop nearly 25% in one of the fastest growing markets for sugar consumption. The Brazilian government has also increased the mandated ethanol content of vehicle fuel from 25 to 27%, providing refineries with incentives to prioritize fuel over sugar. In India, rising domestic stockpiles and the plummeting price of sugar are causing many government bodies to consider implementing similar mandates encouraging farmers to produce ethanol. As more countries take measures to mitigate sugar losses, we can expect to see the price of the commodity rebound as the global supply diminishes.
Climate instability is the final and most unpredictable factor that will dictate the future of the global sugar supply. While ample rainfall in Colombia, India, Pakistan, and the European Union led to increased cane and beet yields in 2014, unfavorable weather conditions in the Philippines resulted in lower sugar output. The erratic droughts and rainy seasons across different regions are obviously unpredictable, and are likely to become even more so as the effects of climate change are realized.
The Bottom Line
The world’s sugar glut days may potentially be numbered, but potential threats have yet to materialize any significant impact on the global sugar market. As the cocktail of sugar policy reform, demand fluctuations, and global climate change threatens to ignite a period of “sugar insecurity”, supply chains would do well to take advantage of record low prices and secure cheap supply into the end of the decade. The future of global sugar stockpiles may be uncertain, but your supply doesn’t have to be.