Sugar (centrifugal) Producers
Sugar is one of the oldest traded commodities in the world. The commodity has had a large influence in economies and politics worldwide from the 15th century onwards. Presently sugar is one of the most regulated commodities being subject to quotas, subsidies and import duties in almost every country.
Sugar come in two distinguishable groups; raw sugar and refined sugar. Sugar can be produced from sugar cane or sugar beet. Cane sugar accounts for 80% of all sugar produced in the world, 20% comes from sugar beet. Refined sugar from beets and cane is seen as the same, consequently there is no difference in sugar prices between the two.
A sugar cane plant will grow back many times after it is first cut. Sugar cane is typically only replanted every six or seven years. The initial investment of planting sugar cane is very high but variable costs after that are relatively low. The downside to this 7 year cycle is that farmers do not have a lot of flexibility with regards to planting other crops when sugar prices are low. What we see is that output is only minimally reduced when sugar prices fall below break even levels.
Producing sugar from cane or from beet is a very different process. The by-product of sugar production from cane is bagasse. Bagasse is mainly used as biomass for generating steam in sugar processing factories. The by-product from the sugar beet process are beet pellets. Beet pellets contain about 10% protein and are high in energy and fiber; the product is used in the feed industry. Another residue from making refined sugar from sugar cane and sugar beet is molasses. Molasses is a viscous by-product and is the principal ingredient in the distillation of certain rums. Furthermore, molasses is a feed ingredient and is used as an energy source as well as a binder.
Brazil is by far the largest producer of sugar in the world, producing around 36 million tons per year. The country accounts for 25% of the worldwide production and about 50% of world exports. Consequently, Brazil is the most important market for sugar prices in the physical market. India is the second largest producer with around 27 million tons and the EU produces around 16 million tons. Sugar in Brazil and India is produced from sugar cane, while European sugar is produced from sugar beet. Around 70 countries in the world produce sugar from sugar cane, 40 from sugar beet, and 10 from both. Other important sugar producers are China, Thailand and the United States. The 10 largest sugar-producing nations produce around 75% of world sugar. These countries are the focal point for determining worldwide sugar prices. The production and planting figues of these countries are monitored by the USDA and private insitutions such as Kingsman.
Governments in sugar producing countries have a large influence on sugar prices. Government’s issues export subsidies, minimum fair prices and ethanol mandates to support the local market. Because of the influence of these factors on sugar prices, the product is arguably one of the most difficult commodities to trade. Over 100 countries in the world produce sugar and all of them have some kind of intervention or subsidy in place.
Since 1990 the consumption of sugar has been growing at a rate of around 5% per year in Asia and the Middle East and 4% in Africa. Total world consumption at the moment is around 170 million tons, which is around 25kg per person. The ten largest importers of sugar consume around two thirds of the worlds total consumption. While consumption of sugar has gone up, sugar prices in recent years have been under pressure because of large supplies in the world market.
The largest importers of sugar are China, Indonesia, the US, and Europe. Sugar is a highly international commodity and most sugar prices in the world are quoted in USD. The international trade in sugar is around 20-25% of total world demand; this is high when we compare it to other commodities in which trade is normally 10-20% of world demand. Years ago sugar trade was mainly carried out between governments and through long-term contracts. In recent decades however, sugar trade has been liberalized. The fact that the market is more open now has had a large influence on sugar prices.
In 2012 the total amount of sugar traded on the international market was 56 million tons. The trade is expected to increase to 65 million tons in 2022. Presently, two thirds of all exported sugar is raw sugar while one third is refined sugar. Of all the sugar traded internationally 90% is sea borne. Sugar producing companies are normally bound to one region, while the trading houses are much more international. Because of the liberalization of sugar trade, sugar prices have become much more sensitive to world market events.
In the raw sugar market, Brazil remains dominant. Furthermore; the top 5 exporters of raw sugar supply 85% of the total exported volume. On the demand side the FSU countries, the Middle East and Asia account for 70% of world import demand for raw sugar. Not surprisingly these countries are the leading forces of demand side sugar price setting in the market.
Refining white sugar at destination instead of origin has increased in recent years. Reasons for this increase were both economical as well as political. For a long time the EU was the only sizable supplier of white sugar. At present there are several refineries worldwide and high quality white sugar has been partly replaced by low quality sugar. Brazil, Thailand, Mexico and the EU supply over 60% of all white sugar exports. The ten largest importing countries of white sugar represent less than 45% of white sugar demand. On the futures market the sugar price of white sugar trades at a premium to raw sugar. The retail sugar price of raw sugar is normally higher than the sugar price for white sugar due to the misconception that raw sugar would be healthier than white sugar.
The rise of ethanol, especially in Brazil, has influenced sugar prices significantly. Brazil is the second largest producer of ethanol worldwide and the single largest producer of sugar cane based ethanol. The United States is the largest producer of ethanol, producing 52 billion liters per year. American ethanol however is mainly produced from corn. Brazil produces 28 billion liters of ethanol from sugar cane every year. In Brazil demand for sugar cane from the ethanol industry has surpassed the demand from the sugar industry. Brazil also exports ethanol, predominantly to the EU, South Korea, the US and Japan.
In terms of export revenue, sugarcane is one of the most important crops for Brazil, together with soybeans and coffee. Sugar prices have been falling faster than prices of the other commodities, which has had a great impact on the industry.
Brazil is the largest producer of sugar cane. The country produces almost 550 million tons of sugar cane on a total of 1.6 billion tons worldwide. Almost 90% of sugar production takes place in south-central Brazil. The state of Sao Paulo produces 60% of all sugar cane in the country. The price of sugar cane is not solely related to sugar prices as more than 50% of sugar cane in Brazil goes into ethanol. When sugar cane is harvested the first cane is generally used for ethanol production because it is the quickest way to make money. This is needed in order to meet urgent needs as well as well as pay off bills to suppliers.
All sugar in Brazil is being produced from sugar cane. Because production takes place in such a concentrated area of the country, sugar prices are very much influenced by weather circumstances. The largest export port for Brazilian sugar is the port of Santos in the state of Sao Paulo. Getting the sugar from the mills in the interior of the country to the ports on the coast, poses several challenges. In recent years there have been large investments in infrastructure. Train is the primary way sugar is exported at the moment.
Cosan, the largest sugar producer in the country, has invested heavily in railway infrastructure. Sugar prices are established in the world market and it is important for Brazil to stay competitive throughout the supply chain. Freight costs should never be too big a part of sugar prices to stay competitive. Sugar is mainly exported from the port of Santos but in recent years there have been logistical problems getting the sugar out of the country. Long ship line-ups, congestion on the roads, and a large fire at the biggest sugar terminal are some examples of logistical problems in recent years. The close proximity of Santos port to the main growing area means there are few alternative ports to export from.
Brazil has it’s own futures exchange for sugar prices on the Brazilian Mercantile and Futures Exchange (BM&F). The contract for crystal sugar prices will be delivered at the port of Santos and the contract is settled based on the Santos BM&F crystal sugar price index. The exchange also has an ethanol futures contract on which domestic traders can hedge ethanol prices.
Brazil has been a front-runner in the production of the biofuel ethanol for many years. Together with the US, Brazil produces just short of 90% of all ethanol worldwide. Brazil is considered to have the first sustainable biofuels economy. Ethanol works so well in the country because of the favorable conditions for agriculture, cheap cane feedstock, and highly mechanized production process. In 2014 the Brazilian government increased the mandate for ethanol in gasoline to 27.5%, up from 25%. As of now, there are no light vehicles in the country that purely run on gasoline. More than half of all the sugar cane in the country goes towards ethanol. While the ethanol mandate ensures demand for the product, gasoline from fossil fuels is also subsidized. Low gasoline prices consequently lower ethanol prices. Another problem is that ethanol is mainly sold in the local market, which is denominated in real. Sugar, however, can be sold in the international market in which sugar prices are denominated in dollars. When the real weakens, which has been the case the past few years, producers prefer to sell sugar in the international market. While sugar prices have been on the decline the last few years, the rising dollar has offset some of those price declines for Brazilian crushers.
In Asia there are three big producers of sugar cane; India, China and Thailand. India is the biggest producer in the region producing around 27 million tons of sugar per year, China produces approximately 14 million tons, and Thailand 11 million tons. While China is the number 4 producer of sugar in the world the country, together with Indonesia, is also the biggest importer of sugar at around 4 million tons per year. While these countries are the largest importers of sugar they also have import quotas in place to protect sugar prices in their local markets.
China has had the same import quota since 2004, while becoming a sizable importer since then. Companies with quota licenses import against a favorable 15% tariff, companies without pay 50% import duty. Indonesia recently reduced import quotas while Thailand uses sugar price supports and import tariffs to protect the local market. Despite the fact that Thailand produces inefficiently, it has managed to become a major player in the industry. All the restrictions have a great influence on sugar prices in these countries.
The production of Indian sugar cane mainly takes place in the state of Uttar Pradesh. The crop is normally harvested around September/October and harvested and crushed within the 160-180 days after that. In India a strange situation exists in the traded sugar market. In the season 2014/2015 the country exported 1.5 million tons while importing 1 million tons of sugar. The situation exists because millers have to buy sugar cane at high, government set, prices. Due to inefficient production this minimum cane price is still below cost price for the farmers, but well over world market prices. Thanks to these high input costs for sugar millers, sugar prices in India are high. These high sugar prices results in cheaper imports flowing into the country, despite steep import tariffs. To support the Indian millers and exporters consequently the Indian government subsidizes the export of sugar. Sugar prices in the country are heavily distorted because of the myriad of government interventions.
In Thailand there is yet another intervention system in place. The 1984 sugar cane act ensures that profits of crushing sugar cane are equally split between the farmer and the miller. Of the profit made at the end of the year 70% goes to the farmer and 30% goes to the miller. Upon delivery to the cane mills the farmer receives an up front payment calculated on a sugar price calculated by the government. The advance payment should not be less than the expected end of season average sugar price. If the advance payment was higher than the average at the end of the year the difference is corrected in the following season.
Because of the positive effect of low freight costs on sugar prices, Thailand is the main origin for exports to regional buyers such as China, Japan and South Korea. The demand from China is so big that it is also the largest buyer of Brazilian sugar. India, Pakistan and China all have futures exchanges for hedging their sugar prices. When trading internationally however, the ICE and LIFFE are the exchanges that are used most often.
Europe and the United States are among the biggest importers of sugar as well as they are sizable producers. Because the climate doesn’t allow for sugar cane to grow in Europe, sugar beets are the feedstock for sugar production. Europe is the largest producer of sugar beet followed by Russia and the United States. In the US, sugar is being produced from beet as well as cane.
Europe produces around 16 million tons of sugar per year and imports 3.5 million tons. The United States produce 7.5 million tons and import 3 million tons. Both continents have significant influence on sugar prices worldwide. Europe traditionally is a big exporter of refined sugar; the continent is the fourth biggest exporter of the product after Brazil, Thailand and Mexico.
In Europe, France is the biggest producer of sugar beet; producing 30% of the European total, Germany with 20%, and Poland with10% are number 2 and 3. The country block lost its influence on the sugar market after imposing quotas and restructuring minimum beet prices in 2006. In 2017 these restrictions will be lifted and expectations are that the sugar output will increase by 20% as a result. These changes will have a large influence on sugar prices because Europe is expected to become a major sugar exporter once more. A report by the European union showed sugar beet prices on the continent could fall by as much as 23% because of the measure. Europe still has stiff import duties to protect internal sugar prices. Sugar refineries in Europe that rely on imports of raw materials will struggle to compete with local supply when import tariffs stay in place.
Sugar cane in the US is grown in four states. Florida produces around 50% of all sugar cane in the United States, Louisiana produces around 40% and the remaining 10% are being produced in Texas and Hawaii. Sugar beet is being produced in colder climates with evenly distributed rainfall. In the US the largest sugar beet producing states are Minnesota, Idaho, North Dakota and Michigan. In the past sugar from cane was the largest type of sugar in the United States in recent years beet has overtaken it and now supplies 55% of sugar.
The sugar from beet or from cane is chemically 99.95% identical and as such is sold in super markets as the same product. Beet sugar in general is cheaper to produce and only needs one refining process at one plant. Beet can also grow in a wider variety of climates.
Raw sugar futures are traded on the US based ICE futures exchange while white sugar is traded on the NYSE-LIFFE exchange in London. Sugar prices on both exchanges are quoted in USD. The most actively traded contract it the ICE no.11 (world) sugar contract. Ports of delivery are located worldwide and the two exchanges are used by traders worldwide to hedge their sugar prices.