On May 9th, the NYBOT (New York Board of Trade) held its first annual “Sugar Market Outlook” at the Waldorf Astoria in New York City. The event was well attended and many of the major commercial participants in the Sugar industry were in attendance.
The presentation began with an overview offered by Michael Liddiard of Kingsman Americas. Liddiard began by quoting world production of Sugar at 150 Million Metric tons. The sugar market has basically been in a sideways pattern from 1994 to 2004; within a range, generally speaking, 5 to 15 cents. The stagnated price during this decade has stunted investment in Sugar with the notable exception being Brazil. The European Union has quashed its subsidies to Sugar farmers, the result of which has reduced world supply (on average) by over 5 Million Metric tons per year. Consumption of Sugar has increased steadily for the past 25 years. Currently the demand and supply have been at a deficit for the past 3 years. A scenario such as this relies on supply to remain constant just to maintain the current deficit. With changing weather patterns any disruption could throw this supply/demand situation into an even greater imbalance rather quickly.
World Sugar Monthly Continuation Chart
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By far the key speech of the seminar belonged to Brazil’s Eduardo Pereira De Carvahlo. Brazil’s stance on the Sugar business no longer views Sugar as a food source. Sugar is now viewed as an energy source. De Carvahlo stated “the world cannot rely on Brazil to supply any Sugar shortages.” This quote alone was worth attending the conference for! The simple fact is that Brazil is currently running at capacity refining white sugar. Currently the country uses 50% of the crop for Ethanol and 50% for refined sugar. There is excess capacity for Ethanol but 50% of their crop takes up 100% of their capacity for refined sugar. In 2003 there were 100,000 vehicles in Brazil running on Ethanol. Today (2006) there are 900,000 Ethanol powered vehicles. The country may likely turn more Sugar into Ethanol if demand spikes, which could further deplete the supply of refined white Sugar.
The United States still has a large number of Sugar farmers subsidized. The changes in the EU may make their way over here. Brazil is already protesting the US subsidy to the WTO, so another fundamental shift may occur if US Sugar farmers lose their subsidies. President Bush is calling for increased use of Ethanol in the US and this means the 54 cent tariff that the US charges on imports is likely to be lifted. In the event that the tariff is in fact removed, then imports from Brazil will likely flow quickly into the US. Keep in mind that Brazil is geared to produce excess Ethanol rather than excess Sugar. A repeal of the US tariff will likely cause a large decrease in refined white in Brazil.
World Sugar October2006 Contract, Daily Bar Chart
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The tone of the conference was quite optimistic and for the next few years I tend to agree that Sugar is likely to remain strong and get stronger in the very near term. Despite the dramatic price reversal in the latter half of May, the fundamentals have not changes and Sugar is still in short supply. The main problem with this market, in my opinion, is that new buying has dried up and the bulls are sitting on the sidelines.
by John Rose