Sugar market facing potential structural change – visiting international expert
The global sugar market is facing potential structural change in terms of both production and consumption, and this is set to have far-reaching impacts on sugarcane producers internationally and in Australia, according to Rabobank's global sugar strategist Andy Duff.
Brazil-based Mr Duff was in Australia for Rabobank's inaugural Sugar Symposium, where he was keynote speaker earlier this month, presenting his outlook for the sugar sector in front of more than 200 growers and industry representatives.
Mr Duff said while the sugar market would always be cyclical – and at the mercy of weather and currency movements – there were now structural changes contributing to the current imbalance in global sugar markets.
Mr Duff's observations come as Australia has taken the step to commence formal proceedings at the World Trade Organisation over subsidies Australia alleges has caused a jump in Indian sugar production and exports, leading to a significant downturn in world sugar prices and hurting Australian producers.
Consumption slowdown
In terms of global sugar consumption, Mr Duff said, the world was starting to see heightened concerns around the prospect of a slowdown in consumption growth. "Three or four years ago, these concerns didn't really warrant a mention, and even two years ago, many thought this trend could be a 'flash in the pan'," he said.
"But there is now no doubt that slowing consumption growth is a real prospect, as governments and multi-national companies around the world take steps to reduce sugar and calorie consumption.
"But the question is, to what extent will these changes affect the sugar market?"
Conceding it is difficult to determine the long-term impacts of this shift towards reducing the sugar component in beverages and processed foods, Mr Duff said "you don't need much of a reduction in sugar consumption to have an impact on sugar prices".
"For example, a five to 10 per cent reduction in global industrial sugar use and also household use in advanced economies will generate a significant one-off slowdown, or even a modest shrinkage, in global sugar consumption over the next few years," he said.
"Against that however, we will continue to see sugar consumption increase in emerging economies around the world, as their populations move up the income scale."
Taking into account both of these divergent trends, Mr Duff forecasts global sugar consumption will grow at a slower rate than in the past, at an estimated annual growth rate of 1.8 per cent in the years out to 2030, down from the 2.4 per cent annual growth rate from 2000 to 2015.
Increasing supply
In terms of the production-side of the equation, Mr Duff said there have also been big structural changes at play, which have seen a significant increase in the capacity of production out of Thailand, and also Brazil and India, in the past decade.
"Sugar is produced in over 100 countries around the world and, in most cases, policy measures are in place to support growers and processors," he said. "When such policies are changed, it often has regional and sometimes global consequences for production and trade flows."
Now the biggest distortion to global trade is taking place in India, Mr Duff said, with "tremendous support for their domestic cane prices" stemming from government support measures.
"After last season's huge crop, Indian warehouses are literally groaning with sugar, which has seen India introduce measures to encourage that sugar on to the world market," he said.
At five million tonnes, over a million tonnes more than Australia's annual sugar export program, Mr Duff said this additional Indian tonnage had come at a time when the market isn't asking for it and prices are already low. That said, it is unlikely that Indian exports will compete directly in Australia's major markets of South Korea and Japan, he said.
"However, it is having an impact on global prices and the world is watching closely just how big the Indian crop will be next year," he said. "Australia this month lodged a notification with the World Trade Organisation as to whether India is in breach of its obligations."
Regardless of the outcome with the WTO, Mr Duff said, it was expected to take some time to resolve, and as such, surplus Indian sugar production, weather allowing, was likely to remain a structural issue for the time being.
Brazil
In light of these possible structural consumption and production shifts, Mr Duff said there were many measures Brazilian cane growers, like those in Australia, were taking to remain competitive.
"Like growers here in Australia, Brazilian producers are fully exposed to the market and many are taking measures to weather the storm," he said. "These include prudent steps to maintain the financial and capital structure of their business and also, liquidity.
"From a production perspective, growers have been doing this by focussing on keeping their costs low and adopting methods to keep yields high, such as controlled traffic at harvest, minimising soil compaction and looking at different methods of planting to ensure good germination and crop density."
Mr Duff said Brazil, like Australia, is facing a plateau in yields.
"With both Australia and Brazil recording minimal productivity gains in recent years, it will be innovations in sugarcane varieties that will be needed to shift the needle in terms of yield advancements going forward," he said. "And any yield improvements, together with reductions in the cost of production, will help growers mitigate the impact of the cyclical and structural forces at play and capitalise on opportunities when the price cycle starts to turn."
Mr Duff, who also spent a week visiting key Queensland sugar-growing regions, has been analysing the sugar market for more than two decades – the past 10 years in Brazil. Based in São Paulo, Mr Duff also heads up Rabobank's team of research analysts based in South America.
Held at the Burdekin Theatre in Ayr, the Rabobank Sugar Symposium also heard from Diego Ferres the head of research and development at the world's largest sugarcane technology centre, CTC in Brazil alongside other industry leaders covering topics including big data and the circular economy.
