Sugar Output Bullish On El Nino Pattern

Global sugar prices are likely to remain elevated through the year with the world’s supply surplus forecasted to dip sharply from regions, including Europe, China, Thailand and India, as shifting weather patterns related to El Nino raise concerns about production.

The International Sugar Organization on May 22 sharply reduced its projection for a global sugar supply surplus in 2022/23 (Oct-Sept) to 850,000 tons from 4.15 million tons seen in its previous quarterly report in February. Global sugar production is now seen at 177.36 million tonnes, down from 180.43 million tonnes previously. Consumption was increased by 233,000 tonnes to 176.51 million tonnes.

Raw sugar prices represented by Sugar no. 11 contracts at the Intercontinental Exchange (ICE) have increased 29% year-to-date to about 25.82 cents per pound, slightly lower than this year's high of 27 cents per pound, the highest it has been since 2011. Sugar prices in the Europe Union, for example, increased by 61% on average in February and March compared with the same months in 2022.

“Sugar fundamentals are quite bullish for the prices to remain elevated in the short to medium term,” Girish Chhimwal, a sugar analyst at S&Ps, told CNBC.

There's a multitude of factors behind rising prices, from bad weather, to the war in Ukraine, Diana Gomes, an analyst at market research group Bloomberg Intelligence, told the BBC. "The sugar price has been surging recently, because we are expecting a shortfall in terms of production, and the weather risk is really what's driving this inflationary pressure," she said.

Changing weather patterns are also supporting prices, raising concerns that it could reduce production. The US Climate Prediction Center on April 20 raised the likelihood of an El Nino weather pattern emerging between August and October to 74% from 61% a month ago.

El Nino

El Nino is typically associated with increased rainfall in parts of southern South America, the southern United States, the Horn of Africa and central Asia, according to the World Meteorological Organization (WMO). In contrast, El Nino can also cause severe droughts over Australia, Indonesia, and parts of southern Asia.

“The world should prepare for the development of El Nino, which is often associated with increased heat, drought or rainfall in different parts of the world,” WMO’s Secretary-General Petteri Taalas said. It “could also trigger more extreme weather and climate events,” Taalas said.

Speculation that lower-than-expected sugar production in India would prompt the government to curb sugar exports is another factor that has pushed prices higher. The Indian Sugar Mills Association cut its 2022/23 India sugar production estimate to 32.8 million metric ton from a January estimate of 34 million metric ton.

Exports from India are set to almost halve to 6 million tons in the year ending in September from about 11 million tons a year earlier, and could slump to as low as 4 million tons next season, according to a Bloomberg survey in March of traders and analysts.

Brazilian Output

Higher international crude oil prices and the strengthening of the Brazilian real against the United States dollar also contributed to the overall increase in world sugar prices, according to the UN’s Food and Agricultural Organization.

Despite the positive outlook for the 2023 sugarcane crops in Brazil, the slow start of the harvest due to above-average rains provided additional support to prices, the UN organization said.

Brazil and India rank as the world's top two sugar producers every year, though which country is first and which is second can vary from year to year.

“The rising price of confectionary and sugar-based beverages will incorporate rising sugar values,” John Stansfield, a senior sugar analyst at commodity data platform DNEXT, said. “In a bar of chocolate you have milk, cocoa powder etc. and these costs are also rising. Energy and labor costs to make such goods are also rising,” he said.