Sugar: June quarter 2020
World sugar prices to remain low
The world indicator price for raw sugar is forecast to fall to US11 cents per pound in the last quarter of 2019–20 and continue to decline to a decade low of US10 cents per pound in 2020–21. This revision comes after Brazilian sugar production increased significantly due to an expected fall in ethanol production in response to very low oil prices and the depreciation of the Brazilian real.
Global sugar demand from food industries is expected to contract because government lockdowns will reduce out-of-home consumption and lower household incomes will reduce retail sales of products containing sugar. These factors represent a reversal of events during the first half of 2019–20, when growing consumption and production shortfalls in India and Thailand led to a rise in prices.
In 2020–21 prospects for demand and supply will be tied to measures implemented to control COVID-19 and the speed of economic recovery worldwide. A slow return to social and economic activities will continue to dampen demand and increase supply via linkages to energy markets.
On the supply side, the current outlook for low crude oil prices and a weak Brazilian real are expected to continue to drive high sugar production in Brazil in 2020–21. This is expected to add to rising production in India and Thailand due to returns to average seasonal conditions in these countries following poor seasons. Government support policies in major sugar-producing countries are expected to continue to impede a reduction in the global area planted to cane. World production is forecast to rebound to recent highs in 2020–21, but consumption is expected to recover only slowly.
Increasing Indian exports risk further falls in prices
The drawdown of sugar stocks in India slowed in the second quarter of 2020 because of the impacts of COVID-19. Strict national lockdowns significantly reduced sugar consumption in India, and labour shortages and limited port operations disrupted Indian exports to the Middle East and Central Asia.
The fall in Indian exports during this period contributed to an increase in the global white sugar premium. This premium and lower energy costs are providing incentives for toll refineries in the Middle East and Central Asia to purchase high-quality Brazilian raw sugar for processing and export as white sugar.
The build-up of stocks in India put pressure on Indian mills to accelerate exports in the latter half of 2020. A slower reopening and recovery of the Indian economy from COVID-19 poses a risk of further falls in domestic consumption and the exchange rate. These risks are likely to be realised if the country is slow to contain the pandemic and the effectiveness of government stimulus remains limited. These factors could push Indian exports above the current forecast of 5 million tonnes for 2019–20. If Indian exports exceed 5 million tonnes, world sugar prices could fall further than expected in the short term.
Australian supply chain resilient in the wake of COVID-19
Australian sugarcane production is forecast to increase slightly from last year to around 32 million tonnes in 2020. Late summer and early autumn rainfall benefited cane yields in central and northern Queensland. However, production in southern Queensland is forecast to remain low due to poor yields and reduced area. The average commercial content of sugar is forecast to fall from the high level reached last year, contributing to a slight fall in sugar production to around 4.4 million tonnes. Australian sugar mills have implemented hygiene and social-distancing measures to combat COVID-19. No significant disruption to operations has been experienced to date.
The Australian export price of sugar is forecast to remain low. However, the effect of lower export prices on revenues denominated in Australian dollars is expected to be partially offset by an assumed lower exchange rate in 2020–21.
The resilience of the Australian supply chain will likely reaffirm Australia's reputation as a reliable trading partner in Asian import markets, where demand prospects look positive relative to the rest of the world. This is because China, Japan and the Republic of Korea have partially reopened their economies after containing the initial wave of COVID-19. Australian exports are also expected to benefit from lower than expected production in Indonesia, which has reduced import restrictions. This comes after unfavourable seasonal conditions in late 2019 reduced cane yields and impeded growth of ratoon crops in key cane-producing provinces in Indonesia. Production shortfalls and rising sugar prices in Indonesia are expected to increase Indonesian import demand in 2020.
Opportunities and challenges
Global capacity to contain COVID-19 and minimise disruptions
The degree to which countries worldwide contain COVID-19 and resume social and economic activities remains uncertain. Out-of-home consumption will increase with the reopening of hospitality businesses, and a recovery in incomes will support confectionary and beverage sales in supermarkets.
Sugar production will likely remain elevated because low crude oil prices are likely to encourage Brazilian sugar mills to focus on sugar production as ethanol becomes uncompetitive as a fuel source. Even if global economic activity rebounds faster than anticipated, demand for oil will be subdued. This is because government restrictions on international and domestic travel are likely to continue in some form until the impact of COVID-19 can be effectively controlled.
A resurgence of COVID-19 infections in Asia remains one of the biggest risks to Australian sugar exports. A slower than anticipated recovery of demand in countries such as Japan and the Republic of Korea is likely to result in Australia facing intense competition in these markets from Thailand when that country begins its crushing season in October.
Contractual risks increase amid possible supply chain disruptions
Risks from possible supply-chain disruptions in different countries are being factored into international contracts for the sale of sugar. This will continue to affect supply relationships as markets assess relative risks imposed by COVID-19 in different countries.
Force majeure clauses have been invoked in India to cancel export contracts during the country's national lockdown in the second quarter of 2020. Uncertainty surrounds the capacity of Brazil's Port of Santos to deliver record high commodity exports if COVID-19 cases continue to increase in São Paulo state.
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|Agricultural commodities: June quarter 2020 - Commodities - data tables XLS||12||186 KB|
|Agricultural commodities: June quarter 2020 - Statistics - data tables XLS||32||592 KB|
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