Refined Sugar Sours as Premium Shrinks Amid Glut: Commodities

Refining Sugar Sours as Premium Shrinks Amid Glut
Workers load harvested sugar cane onto a truck near the village of Khan Phram in Saraburi province, north of Bangkok. Photographer: Dario Pignatelli/Bloomberg

The two-year surge in the premium that refined sugar commands over the raw sweetener is reversing as Thailand and Mexico add record shipments to supplies that are already greater than global consumption.

Brazil, the top exporter, is boosting output to a record, overseas sales of white sugar from No. 2 shipper Thailand will rise 11 percent and Mexico, ranked fifth, will ship 74 percent more, according to company, industry and government estimates compiled by Bloomberg. The glut means lower costs for Dunkin’ Brands Group Inc. franchisees and potential profits for traders betting the refining premium will shrink.

“I don’t see a big chance of gains for the white premium in the short-term,” said Thaisa Colombo, a broker on the sugar and ethanol desk at Sao Paulo-based H. Commcor DTVM, which trades futures in Brazil, the U.S. and London. “The crop in Brazil is already so big that the supplies from Thailand and Mexico will only add to the surplus.”

Premiums surged after raw sugar prices hit a three-decade high in 2011, leading to record global production. Since then, futures slumped 53 percent, exceeding the 44 percent retreat in white sugar as supplies outpace demand by a record 10 million tons this season, up from 6.2 million a year earlier, according to the International Sugar Organization.

The price difference between white and raw sugar, which rose from $50 in February 2011 to $108 a ton today after this year’s high of about $127, will erase this year’s gains and drop 16 percent to $91 a ton by the end of next month, according to the mean of eight trader estimates compiled by Bloomberg.

Thai Mills

Raw-sugar futures dropped 14 percent to 16.83 cents a pound ($374 a ton) this year on ICE Futures U.S. in New York. White sugar fell 8.5 percent to $479.20 a ton on NYSE Liffe in London. The premium rose 16 percent this year, after gaining 6 percent in 2012 and 27 percent in 2011, data compiled by Bloomberg show.

Rising supplies are also driving down the cost of grains and coffee, with a 4.4 percent retreat this year in the Standard & Poor’s GSCI Agriculture Index of eight commodities. The MSCI All-Country World Index of equities advanced 10 percent and a Bank of America Corp. index shows Treasuries lost 0.5 percent.

Record Re-Melt

The premium for white sugar will spur Thailand’s mills to process raw sugar into the white variety in a process called re-melt that will reach a record 2 million tons of sweetener, said Kannika Vongkusolkit, a marketing strategist at Bangkok-based Mitr Phol Sugar Corp., the nation’s biggest cane processor. That will add to supplies already produced during the season and expand exports to 3 million tons, she said. Re-melting is done in the mills that crush cane using power generated from bagasse, or cane waste.

Mexico will ship 1.7 million tons, from 985,000 tons in the previous season, ranking it fifth, the U.S. Department of Agriculture estimates. While Mexico usually supplies to the U.S., traders are watching the country more closely after 30,000 tons of its refined sugar was unexpectedly delivered into the May contract on NYSE Liffe for the first time in more than two decades.

Brazil is increasing output of raw and refined sugar to a record 35.5 million tons, Sao Paulo-based industry group Unica forecasts. The country produces one in every five tons of the world’s raw sugar and it accounts for about 30 percent of white-sugar exports, according to the ISO, which counts 86 nations among its members. Stockpiles at the end of this season will be 19 percent higher at 56.9 million tons, and will expand further in the next 12 months, Macquarie Group Ltd. estimates.

Different Gluts

Traders are less bearish on white sugar in part because of the relative scale of the gluts. The amount of raw sugar available for export this season will exceed demand for imports by 2.5 million tons, according to Leonardo Bichara Rocha, a senior economist at the ISO. The surplus in white sugar for export will be 1.8 million tons, he said.

The glut may be constrained by rising prices for hydrous ethanol. The cane-derived biofuel used in Brazil’s flex-fuel cars sells for 17.5 cents a pound, or 4 percent more than raw sugar, according to Kingsman SA, a unit of McGraw-Hill Financial Inc.’s Platts.

Center South

Millers in Brazil’s center south, accounting for about 90 percent of national output, will use 53.8 percent of the cane crop for ethanol in the season that started last month, from

50.5 percent a year earlier, Unica estimates. Rain may disrupt the sugar cane harvest in the country this week, weather forecaster Somar Meteorologia said yesterday.

The sugar glut may be curbed because demand is being boosted by slumping prices. Exports of raw sweetener climbed to a record 32 million tons in the 12 months ending in March, according to London-based Czarnikow Group, which traded 800,000 tons of refined product last year. The company raised its estimate for global consumption this season by 1.8 million tons to 174.1 million tons in March.

Further deliveries of Mexican sugar to the London market may be limited because some of the nation’s exporters may have to repackage cargoes to meet bourse specifications, said Michael McDougall, head of the Brazil desk at Newedge USA LLC in New York. Mexico usually packs its sugar in bags that are different from NYSE Liffe requirements.

Hedge funds are holding the third-biggest bearish bet ever on ICE Futures U.S., according to U.S. Commodity Futures Trading Commission data that starts in 2006. The wagers mean any rally in raw sugar may be exaggerated by traders buying back contracts to close out positions, Rabobank said in a report last month. The bank forecasts a fourth-quarter average of 19 cents a pound.

Liffe Positions

Speculators also anticipate lower white-sugar prices, with a net-short position of 7,713 contracts, compared with a bullish bet of 1,351 contracts in the first week of May, data from NYSE Liffe show. The annual surge in demand from Muslim nations stocking up before the start of the holy month of Ramadan in July is starting to weaken because cargoes can take about a month to deliver. If raw sugar rallies, and refined doesn’t, the premium for white sugar will narrow.

Lower prices helped contain global food costs the past two years, with sugar the biggest loser among the five main categories tracked by the United Nations. It’s also helping control commodity expenses for Dunkin’ Brands franchisees, who operate 17,400 Dunkin’ Donuts and Baskin-Robbins outlets across 60 countries, Chief Supply Officer Scott Murphy said in a conference call with investors May 7. Coffee, sugar and shortening costs are forecast to be favorable for the company in 2013 while wheat and dairy are unfavorable, according to a presentation accompanying the call.

Processing Ended

Thailand will produce 10.1 million tons of raw sweetener this season, according to the country’s Office of the Cane and Sugar Board. That’s close to last year’s record 10.2 million tons and 1.1 million more than was forecast in February. Processing ended about two weeks ago and millers will now focus on producing white sugar, said Fabienne Pointier, an analyst at Kingsman in Lausanne, Switzerland.

The country’s raw-sugar exports fell 56 percent in the first quarter while white shipments advanced 2.8 percent, according to the Thai Sugar Millers Corp., a group representing the nation’s 47 mills. Thailand will not stockpile its sugar for next season whatever the premium, said Piromsak Sasunee, chief executive officer of Bangkok-based Thai Sugar Trading Corp., the country’s biggest exporter. The country doesn’t have the option of turning cane into ethanol.

Next Shortfall

Tighter global supply isn’t forecast any time soon, with Macquarie predicting the next shortfall for raw sugar in the season ending September 2015. The predicted deficit of 3.9 million tons will be outweighed by inventories of 55.5 million tons, still 16 percent higher than at the end of last season.

The futures curve is also spurring more white-sugar supply, according to Jonathan Drake, chief operating officer at RCMA Commodities Asia Pte Ltd., a Singapore-based trader that traces its origin to a 19th century edible-oil trading company, and the former head of sugar at Cargill Inc. Most of the market is in contango, with longer-dated contracts costing more than near-term supply, encouraging refineries to buy now and boost processing.

It was the reverse three years ago. “You’re just a few dollars away from turning every factory that can produce white sugar on,” Drake said.