Summary
Cosan the largest sugar producer in Brazil is reporting record profits thanks to the jump in global sugar prices. Prices could remain near or above the current 28 year high into next year, helping sugar producers with good production as well as producers of HFCS, while hurting candy, beverage and food processors.
Analysis
Sugar prices have been zooming this year and elevating profits for the major sugar producers in Brazil and other regions that are having good harvests. As with most commodities, the depressed sugar prices of a year ago, which resulted in losses for those who are now most profitable, resulted in lower acres around the world. Global sugar demand was not wanning with the global recession in part due to low prices at the end of last year. Some of India's major sugar regions are now being hit by a late Monsoon season and drought in some key sugar cane regions. The government of India now projects that rain for the whole season will only be 87% of normal, which will only occur if there are very good rains in the remainder of August and September. With the growing El Nino, that would appear to be overly optimistic.
Cosan, the largest sugar producer in Brazil, has seen production down so far this year due to untimely rains delaying harvest and reducing the sucrose content of the sugar cane from its peak levels. On the other hand this additional reduction in global supplies is pressuring prices up. The other piece of the upward pressure comes from the reduced hedging of producers like Cosan on their future production in the futures market, and the increased purchasing of futures and cash sugar by major food and beverages around the world to lock in current prices and avoid the risk of further increases.
Other winners from higher sugar prices will be the marketers of inputs in Brazil and other sugar producing countries. These include Bunge Ltd., Monsanto, DuPont, Syngenta and Bayer. Major sugar producers (both sugar cane and sugar beet) and traders such as Tate and Lyle, ED&F Man, C&H Sugar Company, American Crystal Sugar Co., Minn-Dak Farmers Cooperative, Pfeifer & Langen Cargill, ADM and new comer Bunge Ltd.will also benefit from higher sugar. Corn Wet Corn Millers will benefit from less pressure on the pricing of HFCS and this will impact favorably Corn Products International, ADM, Cargill and Tate & Lyle. The list of those that will be hurt include major candy and ice cream companies Mars, Nestle and Unilver; food companies: Kraft, Bimbo Bakeries, Flowers International, General Mills, Interstate Bakeries and Gold Medal Bakeries.
Cosan's Finance Director Marcelo Martins expects sugar prices to remain high for at least one more growing season, before higher prices correct the current Supply and Demand imbalance. They continue to dedicate 54% of their sugar production to ethanol and will continue to see improving profits over the next year, as long as their weather improves.
Gary Drimmer consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
