Sugar, a commodity produced, consumed and traded globally, is not only limited to households, but also widely used in industrial applications. The versatility of this soft commodity enables it to hold a distinguished position in the commodity trade environment. Global sugar production in the 2020/21 season is forecast to increase, as production is projected to rebound from the major producers – Brazil, India, and Thailand. In this article, I will discuss the projected recovery in sugar production, and I will also discuss the projected increase in consumption. Investing in the iPath Series B Bloomberg Sugar Subindex Total Return ETN (NYSEARCA:SGG) is a way for investors to track sugar prices higher and lower without the need for a futures account.
Tight Sugar Supply in the 2019/20 Season
In the 2019/20 season, global sugar production estimates stand at approximately 166.2 MMT, as major producing countries reduced output due to weather-related complications and increased ethanol output. Brazil’s sugar output in the 2019/20 season was limited, due to an increase in ethanol production, as ethanol is deemed profitable. Brazil’s Center-South ended the 2019/20 crop year with approximately 589 MMT of sugarcane crush and approximately 35% was directed to sugar production, while 65% was diverted towards ethanol production. Sugar-ethanol plants produced approximately 33 billion liters of ethanol in the 2019/20 season, a 5.1% increase year on year.
Weather-related complications and reduced acreage resulted in lower yields from other major producers. Severe drought and wet conditions led to reduced output from India, EU, and Thailand as production estimates stood at approximately 28.9 MMT, 17.2 MMT, and 8.2 MMT respectively compared to the previous season where production estimates were 34.3 MMT, 17.9 MMT, and 14.5 MMT respectively. As the 2019/20 season began, sugar prices were forecast to surge due to the decrease in output, but prices have since declined by nearly 6% since the beginning of 2020 as a result of the pandemic rattling the commodity markets.
Projected Increase in Sugar Production in the 2020/21 season
Sugar production in the 2020/21 season is forecast to increase to approximately 188 MMT, a 21.8 MMT increase compared to the 2019/20 season, according to the USDA – Sugar: World Markets and Trade report. Production is forecast to recover from Brazil, India, and Thailand. Sugar production in Brazil is forecast to increase to approximately 39.5 MMT, due to a change in dynamic from sugar-ethanol plants. Low gasoline prices have negatively impacted the ethanol industry thus causing a shift in dynamic from ethanol to sugar production, leading to a 46% and 54% split compared to the 35% and 65% split last season.
Thailand’s sugar output is forecast to increase to approximately 12.9 MMT, due to favorable weather conditions. Increased precipitation in the month of August through to September is forecast to ease the pressure on the drought-hit crop, thus increasing prospects for a larger crop. According to the Indian Sugar Mills Association (ISMA), sugar production in India is forecast to increase by 33 lakh tonnes to approximately 305 lakh tonnes, a 12% increase compared to the 2019/20 season, as output is forecast to increase from the major growing states Maharashtra and Karnataka due to favorable weather conditions.
Sugar production in Mexico is forecast to increase by 17% to approximately 6 MMT compared to last season’s estimate, due to favorable weather conditions. Australia’s sugar output is forecast to increase by 5% to 4.4 MMT, also in part due to favorable weather. The EU sugar output is forecast to increase slightly to 17.7 MMT from 17.2 MMT despite the reduction in beet acreage by farmers due to lack of profitability and a ban on neonics in beet seed treatment. Despite the increase in sugar output in the 2020/21 season, I believe forecasts will be lower than anticipated, factoring in weather, acreage reduction, and the effects of the pandemic.
Consumption Forecasts Higher in the 2020/21 Season
Global sugar consumption is forecast to increase in the 2020/21 season by 6.2 MMT to approximately 177 MMT compared to the 2019/20 season, according to data released by the USDA. Consumption is forecast to recover slowly, due to the impact of the coronavirus on economies of different countries. Sugar consumption is forecast to increase in India, Russia, Pakistan, and Egypt to approximately 28.5 MMT, 6.2 MMT, 5.8 MMT, and 3.3 MMT respectively. Consumption in the U.S and Mexico is forecast to increase slightly to 11.1 MMT and 4.38 MMT respectively. China, E.U, and Brazil’s consumption forecasts are projected to remain unchanged.
Indonesia, Bangladesh, Malaysia, South Korea, Algeria, and UAE are forecast to increase consumption in the 2020/21 season. The impact of the pandemic on disruptions in global supply chains, trade flows, and economies due to restrictions in movement has had a massive impact on global sugar demand in the 2019/20 season. Slowly, governments globally are easing lockdown measures and implementing strategies that will assist in economic recovery and strategies to prevent further infections or waves, as countries adjust to the new “normal”. I believe economies will recover and a solution will be found for the virus thus positively impacting demand in the 2020/21 season.
Global sugar production is bound to recover in the 2020/21 season, as production is forecast to recover from major producers. Despite the projected rebound in production in the 2020/21 season, I believe production will be lower than projections in the 2020/21 season. Demand is bound to slowly recover in the 2020/21 season, as the coronavirus has negatively impacted demand in the 2019/20 season. I believe a solution will be found for the virus and economies will recover, and this will have a positive impact on demand.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.