Production will exceed demand by 5.9 million metric tons in the year that began Oct. 1, more than the U.S. consumes in six months, the International Sugar Organization estimates. Global supply including inventories will be the highest ever, the London-based group says. Raw-sugar futures traded in New York may drop 11 percent to 18 cents a pound by the end of the year, according to the median of 15 estimates from traders and analysts compiled by Bloomberg.
Futures fell 44 percent since reaching a three-decade high of 36.08 cents in February 2011 as farmers from Russia to Thailand planted more crops. The drop is moderating global food prices that the United Nations says rose 7.7 percent in the past three months as drought and heat waves wilted U.S. and European wheat, corn and soybeans. Lower prices are helping to cut costs for food companies including Nestle SA (NESN), which spent about 1.5 billion Swiss francs ($1.6 billion) last year on sugar.
“The surplus is probably getting worse,” said Jonathan Kingsman, the chief executive officer of Lausanne, Switzerland- based research company Kingsman SA who has traded sugar for more three decades. “More sugar will have to be stockpiled on lack of demand and we would expect prices to stay under pressure.”
Sugar retreated 13 percent to 20.17 cents on the ICE Futures U.S. exchange this year, extending a 27 percent slump in 2011. The Standard & Poor’s GSCI Agriculture index of eight raw materials jumped 10 percent this year, and the MSCI All-Country World Index (MXWD) of equities advanced 12 percent. Treasuries returned 2.2 percent, a Bank of America Corp. index shows.
Production will rise 2.3 percent to a record 177.4 million tons this season as demand advances 1.9 percent to 171.5 million tons, according to the ISO, which has more than 80 member states. Output rose 19 percent in the past four years and consumption 6 percent. Supply including inventories will gain 3.7 percent to an all-time high of 240.6 million tons as imports contract 6.5 percent, the ISO says.
Brazil, the biggest grower, will produce 38.1 million tons this season, 11 percent more than a year earlier, the ISO estimates. While Russian supply will be little changed at 5.4 million tons, production is up 53 percent from two years ago, when drought decimated the country’s crop, the ISO estimates.
China, the second-biggest consumer after India, will probably limit annual imports to no more than 1 million tons through 2015, Liu Hande, vice chairman of the China Sugar Association, said in a speech in Singapore on Sept. 27. The nation bought 3.3 million tons in the past season, the ISO estimates. Domestic production will reach 14 million tons, from 11.5 million tons, boosting stockpiles to a record, Liu said.
Just as heat and drought curbed corn, wheat and soybean yields this year, so sugar output may be diminished by extreme weather. Production in India, the second-biggest grower, will probably drop almost 10 percent to 23.5 million tons this season because of lower-than-average rainfall, according to ED&F Man Commodities India Pvt., a unit of the commodities trader founded more than two centuries ago.
Sugar prices at the factory gate in India may rise 19 percent to 40 rupees a kilogram (34 cents a pound) by January, according to Narendra Murkumbi, the managing director of Shree Renuka Sugars Ltd. (SHRS), the country’s top refiner. While most of the cane-growing regions are irrigated, there wasn’t enough water left in the reservoirs supplying them to compensate for a below- average monsoon, according to Rabobank International.
Dry weather will probably curb production in Thailand, the second-biggest shipper, said Piromsak Sasunee, chief executive officer of Thai Sugar Trading Corp., the nation’s largest exporter. Farmers will reap as little as 92 million tons of cane this season, yielding about 9.8 million tons of sugar, he said. That compares with 98 million tons and 10.2 million tons in the past season, government data show.
More producers in Brazil may switch to ethanol as sugar prices decline, according to Abah Ofon, an agricultural analyst at Standard Chartered Plc in Singapore. The country is set to be the biggest exporter of the fuel this season and futures rose 6 percent to $2.383 a gallon on the Chicago Board of Trade this year.
Nestle, the maker of Smarties and Aero candy, expects to see “a little bit of lighter pressure” from raw materials in the second half, Chief Executive Officer Paul Bulcke told analysts on a conference call last month. Shares of the Vevey, Switzerland-based company rose 15 percent to 62 francs this year and will trade at 62.43 francs in 12 months, according to the consensus of 30 analyst estimates compiled by Bloomberg.
Hedge funds pared bullish bets on sugar by 48 percent since the start of March, U.S. Commodity Futures Trading Commission data show. They held a net 75,479 contracts in the week ended Oct. 9, compared with a five-year average of about 114,000 contracts. Open interest in raw-sugar futures contracted about 12 percent since mid-June, valuing the ICE Futures U.S. market at about $15.4 billion, bourse data compiled by Bloomberg show.
Australia, the third-biggest shipper, may produce 4.5 million tons in the year started July 1, up from 3.7 million tons a year earlier, according to the Australian government’s forecasting unit. Farmers planted more cane and hot, dry weather raised yields.
Pakistan may export 1 million tons this season after better-than-average rainfall boosted crops, according to the country’s Sugar Mills Association. That compares with sales of only 137,000 tons this year since January, the group says.
“There are mounting expectations that supply could outstrip consumption in the coming quarters,” said Michael Creed, an agribusiness economist at National Australia Bank Ltd. in Melbourne. “Inventories are set to increase.”
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