Why Are Sugar Prices Low?

Implications: World sugar prices have dropped below the 10 cent/lb. level , even as energy prices and food demand increases. Why is this happening, will it end soon and what are the implications for ethanol, HFCS and alternative crops next year?

Analysis: World sugar prices (not U.S. sugar prices) are off 30% from their March high of 15.21 cents/lb., having dropped below 10 cents/lb. for the first time since last October. This is all due to a large jump in supply without a corresponding increase in demand. Brazil, the world's largest sugar producer with 20% of global production and 35% of the world exports has increased production by 1.6 million metric tons, leading to a global excess in production of 11 million metric tons. This will facilitate a projected 15% increase in ethanol production in Brazil which will lead to an increase in ethanol exports to the U.S. later this year. Major agribusinesses like Bunge have already begun to invest in the Brazilian sugar/ethanol industry, while others like ADM continue to search for the right investment. Much of Brazil's ethanol is exported to the U.S. after being dehydrated in a Caribbean Basin Initiative (CBI) country to avoid the import duty still levied on imported ethanol.

India, the second largest sugar producer, in addition to ramping up ethanol production will be switching to other crops for their next crop, given the low price of sugar and high price of other food crops that can be grown on the same land. Clearly there will be a significant drop in sugar production for the 09/10 crop year.

Looking at the U.S. and North America, NY raw No. 14 sugar prices have dropped below the 21 cent/lb. forfeiture level. While consumption of sweeteners continues a slow decline with sugar and HFCS being replaced with artificial sweeteners, there has also been an issue with refining capacity after the February explosion at Imperial Sugar, which is causing other refineries to work overtime.

Anyone looking for more details on the U.S., Mexican, Americas and global S&D should read the USDA Sugar and Sweeteners Outlook that was released this week: http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1386
One statistic of interest is the HFCS market in Mexico which will impact wet millers including ADM, Cargill, Tate & Lyle, and Corn Products International. The USDA projects HFCS sales in Mexico for the 07/08 and 08/09 years to remain at 800,000 metric tons a year dry basis due to relatively low sugar prices in Mexico. At the same time sugar exports from Mexico to the U.S. which is now completely open under NAFTA, will remain high. It would appear that ethanol production from sugar needs to increase throughout the world to pull the demand side on sugar.