Sugar price experts Sucres and Denrees – better known in commodities circles as Sucden – are predicting that for the first time in three years, this season should see a global sugar surplus. The main reasons for this are sugar producing regions of India recovering from droughts, and also increased production in the EU where beet crop quotas have been removed. India is expecting to enjoy a growth in output of 5.2 million tonnes, and Europe a growth of 2.8 million tonnes. By Sucden's estimates, production in 2017-2018 will be at around 132.9 million tonnes, representing both a rise of 9.7 million tonnes on the previous year, and also an increase above predicted consumption, creating a surplus.
Ordinarily, a surplus would mean prices would show increased stability, however Sucden are instead taking the position that volatility in the sugar price is likely. This is for several reasons:
- The Possibility of An El Nino Weather Phenomenon
One thing that could prevent the predicted surplus from happening at all would be an El Nino weather event with enough severity to create monsoon conditions in India, as well as more rainfall in Australia and East Asia. This would lead to disappointing yields of sugar in all of these notable sugar producing countries. El Nino type weather patterns are notoriously difficult to predict, and so while other agricultural factors point towards a surplus, El Nino is a risk that must be considered.
2. Surplus Versus Past Deficit
Another issue is that the predicted surplus will not be especially large when the deficit of the past few years, which Sucden estimate at about 10 million tonnes, is taken into consideration. Rather than the surplus giving the world some sugar reserves 'in the bank', Sucden stated that 'given the downside risks derived from weather uncertainties, in particular, it cannot be ruled out that [the surplus sugar] could disappear at some point'.
3. India's Near Term Sugar Import Policy
A third potential source of volatility in sugar price globally could be India making moves to introduce duty free imports to build up their stocks of sugar. This could be an imminent decision based on recent elections in the Uttar Pradesh state, which is a key sugar producer. Emmanual Jayet, who is head of research for Sucden, has stated that 'The government may elaborate an import programme of 1.7m tonnes to restore a suitable level of stocks of two months' consumption by end-September'.
4. UK 'Sugar Tax'
An interesting development in terms of UK sugar prices that was not commented on by Sucden on this occasion could also be the new 'sugar tax' levies introduced in the spring 2017 budget. This tax applies to beverages with added sugar, and could well see more manufacturers reformulating products to contain less sugar and therefore avoid the tax upping the prices of their products to the consumer, as well as encouraging the public to switch to the now cheaper artificially sweetened or unsweetened alternatives. Over time, this could see a drop-in demand for sugar by big name brands producing the affected products.
Sugar prices in London have been in decline in recent weeks as an overall trend, however all of these risks and possibilities could cause it to be a volatile commodity in the months to come.