Agriculture, like any other industry, is subject to seismic changes in the demand landscape. Consumer preferences evolve over time, and the industry must respond.
One change that will have widespread implications for the ag industry is a drop in the consumption of sugar. This trend was mostly seen in the developed world, where demand has suffered due to health concerns and sugar taxation, as many countries have decided to make it more difficult to consume sugary products. However, is not all bad news for the industry, considering that a shorter supply might keep sugar profitable.
The main drivers of the drop
Once again the main suspect is COVID-19, and as expected the situation is complex. Shortages, supply chain delays and lockdown measures have cut back sugar consumption, driving the drop.
Global sugar demand growth since 1979 (Source: Bloomberg)
Juan Carlos Osorio an agricultural engineer with more than 35 years of experience in the sugar cane industry in Colombia, said that “ domestic consumption falls because the consumer is no longer in the streets or going to restaurants. The consumer is at home,” a situation that is true for over a billion people worldwide.
It seems to be that out-of-home consumption is much higher than in-home consumption. People are more likely to consume sugar in the form of sodas, fast food and treat items when going out. Which could explain why companies like Nestle and Coca-Cola have seen a drop in their sales, after an initial surge caused by panic buying.
Also, it is worth saying that in the long term because of the economic crisis, consumers would be less likely to buy non-essential and treat items. Fortunately, for some cane producers it is still possible to maintain competitive prices.
India – the world’s largest sugar producer – was looking to profit from the projected sugar deficit for 2020. Unfortunately, most industry experts say that the government target of 5 million tons won’t be met. So, mills are reluctant to sell in the hope of getting higher prices, once sugar starts to become scarce. Currently, the Indian government is giving an export subsidy of $28,14 per ton to draw more sales.
Also, Thailand suffered from their worst drought in 40 years, contributing to the cane crop shortfall. Meaning that not only sugar consumption is decreasing worldwide, but the supplies are suffering the same fate.
Global sugar surplus and deficit (Source: Czarnikow)
Juan Carlos, who is also the head of a consulting firm, says that “Brazil and India are the major players in the sugar cane industry”. And added that in the case of Colombia, it doesn’t have large croplands but has “an efficient area in the Cauca Valley, that allows us (Colombia) to survive despite all the current circumstances that affect the global market.”
According to the Czarnikow group, it will be hard to predict how Indian shortfalls will affect sugar consumption and production levels in other parts of the world. What we do know is that in Brazil oil prices are contributing to a 55% increase in sugar production. But how?
Ethanol vs. Sugar
Strictly speaking, sugar production hasn’t really increased in Brazil. It turns out that the dramatic drop in oil prices made ethanol less profitable than sugar. This explains why 47,2% of the cane was destined to the sweetener production, compared to the 36% of last year. Additionally, a weaker Brazilian Real (BRL) contributed to a lower sugar-ethanol parity, making sucrose production more profitable.
Brazilian Real vs sugar (Source: ING Research)
With the recovery of oil prices in the last months, ethanol is expected to bounce back. According to a research made by ING Group, the recovery of the BRL and oil would result in a sugar surplus that could limit the upside prices for the next season. But so far, the value of white sugar is well above 10 cts/lb.
5 day average for white sugar prices. (Source: International Sugar Association)
Juan Carlos mentioned the importance of diversifying. He says that in Colombia the cane industry is “highly diversified – we can produce energy from sugarcane, we manufacture paper. (…) Much of the paper that Colombia consumes comes from the sugarcane bagasse. Those are the reasons why the industry hasn’t been as hardly hit as in other countries”.
What’s to come?
Poor crops in India and Thailand, combined with a drop in consumption and a sugar surplus in Brazil have reduced the sugar deficit somewhat. As a result, the sugar market remains tight. There’s uncertainty over what further effects COVID-19 will have on the markets, so countries like China could offer us a good example of how consumption rates may change.
Bubble tea –a very popular sugary drink in China- saw a bounce in consumption, as online sales went from 160,000 to 330,000 after lockdown measures were lifted. However, there have been new cases in China, raising concerns about a second or third wave of infections across the world. This would make difficult to predict if there will be further tightness and price increases in the sugar market.
“It is estimated that if a second wave occurs, especially in the countries of the northern hemisphere, there may be a fall in the world sugar market” said Juan Carlos. “This could harm the internal markets”
As we can see, the sugar market scenario is quite complex, and the factors that determine market conditions extend far beyond supply and demand. Also, the profitability of other commodities like ethanol can have an effect. But, as an essential agricultural commodity, it is unlikely that the global sugar industry is going anywhere any time soon.