22nd Jun 2012, by Agrimoney
Sugar prices tumbled after Czarnikow forecast a a doubling in world inventories over 2012-13, and hopes faded of changes to Brazil's gasoline regime prompting extra cane to be used in making biofuel rather than sweeteners.
Czarnikow, in its first forecast for 2012-13, estimated that world sugar production would exceed use by 8.4m tonnes, a second season of strong surplus, after the 7.8m tonnes seen in 2011-12.
The forecast, "which indicates global stocks could double be the end of next season", would take the market past a landmark - in meaning that "the process of transition to surplus is reaching its end" after successive years of deficit late in the last decade.
And this would have implications for a market in which beet and cane producers have still been enjoying relatively high prices, compared with alternative crops.
"As the supply response builds the pressure will be on producers to carry stock or cut back on marginal production, which the market has yet to clearly signal," the London-based merchant said.
New York raw sugar for October delivery closed 5.0% lower at 19.75 cents a pound in late deals.
Brazil ethanol factor
Czarnikow's forecast reflected in particular better hopes for cane harvests in Brazil, the top sugar producer, but also the likes of India and Thailand.
"In fact, it would seem that with sugar production on the rise outside Brazil, many producers may be hoping that Brazil regains its focus on ethanol," which the South America also makes from cane.
The comments came amid mounting talk that Brazil may do just that - with speculation that the government is poised to use elbow room allowed by lower inflation to raise a ceiling on gasoline prices.
Higher energy prices would, in incentivising mills to produce ethanol rather than sugar, underpin values of the sweetener too.
Indeed, it could "provide key support for global sugar prices" - as long as the government allows gasoline prices to rise at the pump, and not just at the wholesale level, as it did in November, Australia & New Zealand Bank analyst Paul Deane said.
At Sucden Financial, Nick Penney noted talk of an increase of 10% in gasoline prices.
'Downward bias to prices'
However, Mr Penny also flagged reports that the rise in gasoline prices may be restricted to the wholesale level, meaning ethanol producers may "now have to rely more on the reduction/ abolition of ethanol taxes" to boost their fortunes.
And even abolishing such taxes "will not go that far in increasing the level at which it becomes more remunerative to produce ethanol rather than sugar", a price level which Sucden estimated at 16.3 cents a pound in raw sugar terms, as of a week ago.
Separately, consultancy Job Economia forecast that Brazil was on track for a surplus of 1.6m cubic metres of ethanol production in 2012-13.
"Given these conditions... the expectation is for a relatively stable [ethanol] price scenario with a downward bias, particularly in the case of hydrous ethanol," the SaoPaulo-based group said.
Brazil recovery
Czarnikow's forecast of a rising world sugar surplus in 2012-13 reflected an estimate of output rising by 2.5m tonnes to a record 181.0m tonnes, with an increase in cane-produced sweetener more than offsetting a drop in supplies refined from beet.
Consumption will rise by 1.9m tonnes to 172.1m tonnes.
"While geopolitical tension has the potential to disrupt the physical flow of sugar, consumer acceptance of current prices and the potential for a reduction in substitution by industrial users should drive consumption growth in 2013," the group said.
The group pegged Brazil's output at 39.5m tonnes, up 900,000 tonnes year on year, reflecting a rebound in output in the important Centre South region.
Centre South output was seen recovering 1m tonnes to 32.3m tonnes, drawn from 505m tonnes of cane.
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