2012: EU-27 sugar costs rise despite falling international prices
Despite the decline in international prices, the latest data published by the European Commission on EU-27 refined sugar prices revealed an increase of 11% in 2012. Prices between December 2012 and March 2013 remained unchanged at €725 per tonne. This represented an 80% premium on their international equivalent (White Sugar – London No 5).
EU-27 price rises have been driven by its quota system, which is currently set at 13 million tonnes. EU-27 refined sugar consumption was estimated by the industry at 16-16.5 million tonnes in 2012, which is significantly higher than the quota. This imbalance explains why EU-27 sugar prices continued to rise in 2012, despite falling international prices. Sugar imports into the EU are discouraged through heavy import duties, a situation frequently denounced by global confectionery manufacturers. Sales of sugar and sweeteners in EU-27 countries remained stagnant in 2012, totalling 5.6 million tonnes.
Sales of Sugar and Sweeteners in EU-27 Countries
Source: Euromonitor International
ICE sugar futures for July delivery decline by 5% between 2 April and 14 June
ICE sugar futures are used as a benchmark for the short-term trends in international sugar prices. Part of the decline in ICE sugar futures was down to strong output in Brazil. According to the Brazilian Sugarcane Industry Association (UNICA), sugar production in the south and centre of Brazil, its main sugarcane growing regions, surged to 1.5 million metric tonnes in the second half of April, up from 393,200 tonnes a year earlier. UNICA projects sugar production for the whole season to reach a record 35.5 million tonnes.
The US Department of Agriculture (USDA) added to the regional bullish production projections in its global sugar report, published in mid-May 2013. According to USDA, global output is forecast to rise to a record 175 million tonnes for the 2013/2014 season. Lower prices will result in higher consumption, especially in China, where sales are projected to rise by 1.2 million tonnes. However, carry-over stocks from previous years will prevent ending stocks from building up this coming year. Global ending stocks are expected to total 38 million tonnes, five million tonnes higher than the
2009/2010 level. Global sales of sugar and sweeteners totalled 105 million tonnes in 2012, 1% down on the previous year.
Sugar and Sweeteners - Global Total Volume Growth
Source: Euromonitor International
High volatility
One distinctive feature of international sugar prices in the last weeks has been their relatively high volatility. July futures rose by 3% between 10-14 June on the back of data suggesting that Brazilian farmers had increased their allocation of sugarcane deliveries to relatively more profitable ethanol. The rise reverted weeks of declining prices, which were in turn prompted by bullish global output projections and weakness in the Brazilian real. Brazil is a major sugar exporter and weakness in its currency typically results in lower international sugar prices.
Hedging against volatility
Sugar manufacturers planning to sell in October could hedge against risk by going long (buying) on put options (right to sell) at strike prices of US$0.15-0.16 per pound. Given the latest volatility in prices, hedging strategies through put options minimise risk exposure as the maximum loss is reduced to the payment of the premium of the option.
Hedge through Put Option: Right to sell at US$0.16 per pound in October
Source: Euromonitor International