Global Sugar Market Analysis 2016: Supply Surplus and Price Pressure

Executive Summary

The global sugar market enters 2016/17 crop year with significant supply surplus, the third consecutive year of production exceeding consumption. Brazilian production at record levels, combined with large Indian harvests and EU production growth, creates substantial price pressure. Raw sugar prices declined 25% from mid-2015 peaks, trading near $0.16/lb (NY#11 futures) with limited upside catalysts on the horizon.

Global Supply-Demand Balance

Production Surplus Dynamics

World sugar production forecast at 175.4 million tonnes in 2016/17 vs. consumption of 171.2 million tonnes, creating a 4.2 million tonne surplus:

Major Producer Analysis

Price Dynamics

Raw Sugar (NY#11 Futures)

ICE NY#11 raw sugar futures under sustained pressure from fundamental oversupply:

White Sugar Premium

London #5 white sugar premium to raw sugar (White Premium) remaining elevated:

• Current premium: $88/tonne vs. long-term average $70/tonne
• Driver: Strong refined sugar demand in Middle East, North Africa
• Refinery margins attractive, encouraging raw sugar imports for refining

Key Market Factors

Brazilian Sugar-Ethanol Allocation

Mills' flexibility to shift between sugar and ethanol production based on relative economics remains critical variable:

• Current Mix: 46% of cane to sugar production (vs. 40-45% typical)
• Driver: Weak gasoline demand in Brazil reducing ethanol prices
• Price Sensitivity: Each 5% shift in mix = ~2 million tonnes sugar supply impact
• 2017 Outlook: Expected to maintain elevated sugar production given price ratios

Indian Export Policy

Government export restrictions limiting India's ability to clear surplus stocks:

• Export quota system restricting shipments to 1.5-2 million tonnes
• Domestic politics prioritizing consumer prices over producer economics
• Inventory building creating medium-term export pressure if policies liberalize

Oil Price Correlation

Crude oil prices impact sugar through ethanol demand channel:

• Brent crude at $50/bbl supporting modest ethanol demand
• Brazilian gasoline blend (27% ethanol) making ethanol economics marginal
• Sugar production favored at current oil-sugar price relationship

Trading Strategies

For Physical Market Participants

1. Buyers/Refiners: Favor hand-to-mouth purchasing; avoid building inventory in falling market
2. Hedging: Refiners should hedge white sugar sales but remain unhedged on raw sugar purchases
3. Origin Selection: Brazilian raws offering competitive pricing; Thai sugar for Asian deliveries
4. Quality Specs: Monitor polarization (sugar content) to optimize value

For Traders/Speculators

• Directional View: Maintain bearish bias; sell rallies above $0.17/lb
• Spread Trades: Long raw sugar, short white sugar (compress white premium)
• Calendar Spreads: Contango structure favors storage/carry trades
• Weather Risk: Monitor Brazil weather for October-December (quality risk to final months of harvest)

Risk Factors

Conclusion

The global sugar market faces continued price pressure through H1 2017 as record Brazilian production and large Indian crops create substantial surplus. Raw sugar prices near $0.16/lb reflect fundamental oversupply, with limited catalysts for sustained price recovery absent weather shocks or major policy changes.

For commercial participants, the current environment favors consumers over producers. Buyers should maintain minimal inventory coverage and focus on spot purchases. Producers and origin countries face challenging economics, requiring active hedging and cost management. The market requires significant demand growth or production cutbacks to rebalance, likely requiring prices below $0.15/lb to incentivize supply reductions.