Informacion economica sobre Cuba

07 April 2006
Sugar industry
By Chris Gilmour

The rise in sugar prices looks set to continue for some time

The world sugar price is booming and indications are that it will stay
high for the foreseeable future. The dynamics that affect both supply
and demand, and a number of extraneous factors like the oil price,
should ensure that the outlook for the sugar price is more positive than
at any time since the early 1990s, though the rise will be accompanied
by greater volatility.

The world sugar market is now in the hands of a few large producers and
exporters and the consolidation is having an impact on major
sugar-producing and exporting nations, such as SA.

World sugar consumption has been rising at a long-term rate of 2%/ year,
in line with rising income levels . This is due to sugar being used in a
wide variety of foodstuffs, such as soft drinks and processed foods.

A number of factors are pushing up the sugar price: adverse weather
conditions (mainly in Asia) causing supply reductions; the virtual
disappearance of global surplus sugar stocks – those in the 2006/2007
season could fall for the fourth year in a row; the decline of sugar
beet as a sugar source; and Cuba’s decline as a major producer as a
result of disastrous economic policies.

But the biggest single factor is an ever-increasing demand for sugar as
a feedstock for ethanol production, as a substitute for petrol in road

Supply problems in Brazil and Thailand – the largest and fourth-largest
sugar exporters respectively – have helped push up world sugar prices in
recent times. Thailand experienced its worst drought in 40 years last
year, and the current year’s production is forecast to be 10% down on
the previous year’s.

Southern Brazil, the country’s main sugar-growing region, has also been
hit by climate change.

Globally, most sugar (74%) is produced from sugar cane (as it is in SA),
with sugar beet providing the balance. Sugar beet is grown mainly in the
northern hemisphere and production has been declining for some time.
Sugar made from beet, though identical to cane sugar, is more costly to
manufacture than that made from cane.

The only reason sugar beet is competitive on world markets is extensive
export subsidies. These subsidies are being phased out gradually in the
EU and will be gone by 2012. As they are taken away, beet production is
likely to fall. It’s estimated that 80 out of 187 sugar factories in the
EU may go out of business by the time the subsidy withdrawal is complete.

Little wonder, then, that European sugar beet converters are courting
foreign sugar cane manufacturers like SA’s Illovo – Tereos of France and
British Sugar have made unsolicited bids for the company. (See Companies.)

Christoph Berg, an economist at sugar consultancy FO Licht, says: “2005
was a watershed year for sugar. Sugar became inextricably linked to the
oil price – the sugar price has entered uncharted waters. 20c/lb doesn’t
seem unrealistic, though some people are talking of 40c/lb in the near
future, but that would require political upheaval [affecting] the oil
price.” The sugar price is now trading on the New York Mercantile
Exchange at 17c/lb from 9c/lb early last year.

Apart from the ethanol boom, the decline in Cuban production is the big
reason behind the production shortage. In the 1970s, Cuba produced
almost 7 Mt annually, and was the world’s largest sugar exporter. Most
of this exported sugar was sold to the Soviet Union at preferential prices.

Following the collapse of communism in Russia and the rest of Central
and Eastern Europe, Cuban sugar production plummeted and its export
sales were subject to international market prices which dropped
progressively during that time. Current Cuban production is around 4 Mt
and falling.

The country’s inability to source plant, equipment and fertiliser to
reverse this declining trend means it would be unlikely to increase
production even if the politics allowed for it.

But if there is one reason analysts are expecting a surge in sugar
prices, it is the meteoric rise in demand for ethanol as a fuel alternative.

A year ago, ethanol prices were low. A record sugar crop was undermining
prices and there was lots of extra capacity at Brazilian sugar mills.
But in 2005, the hurricanes hitting the east coast of the US
demonstrated the vulnerability of US oil refining capacity, and world
oil prices rocketed.

In the past 10 years, the oil price has risen by 300%. Sugar, on the
other hand, has remained remarkably stable, apart from the past few months.

Interest in biofuels has increased dramatically in the past 10 years .
In 10 years, says Berg, this picture will have changed even more
dramatically. “Reasons not to embrace biofuels are becoming far less
compelling,” he says.

In the short term, an additional squeeze will come from the recently
introduced renewable fuel standard in the US. Over the next six years,
ethanol production is scheduled to rise from 15bn litres to a minimum of
28bn litres.

Methyl tertiary butyl ether (MTBE) is being phased out as a fuel
additive in the US and is being replaced by ethanol.

But for logistical reasons, only about 570 M of ethanol will come on
stream in the US in the next few months, resulting in a large ethanol
deficit developing in the short term. Japan is also moving away from
using MTBE and using an ethanol derivative.

The US has an added problem in increasing its ethanol usage, as it
manufactures its ethanol from maize, a far less efficient feedstock than
sugar, as maize has to be converted into sugar before it can be
converted into ethanol.

Further ahead, the outlook for a continuing rise in the sugar price is
good. Many Asian countries are using ethanol that is made from grains or
molasses. Thailand has decreed that fuel in vehicles will have to have a
10% ethanol composition in future.

In the EU, the demand for biofuels is still small, mainly because the
available area for growing crops to make biofuels is limited.
Additionally, consumers in the EU prefer biodiesel to ethanol, mainly
because of tax legislation.

In volume terms, ethanol is still small in comparison to ordinary petrol
– only about 2,5% of vehicles run on ethanol around the world, compared
with a figure of 97,5% for petrol and diesel combined. But the climbing
price of fossil fuels will undoubtedly increase the attraction of using
ethanol, apart from the fact that it is significantly better for the

Brazil and India are in the forefront of investment in the global sugar
industry. New mills and plantations are coming on stream in Brazil in a
big way. Plinio Nastari, president of Brazil’s Datagro, says Brazil will
need to produce 700 Mt of sugar cane by 2014, which equates to a
compound annual growth rate of 8% from current levels. It is estimated
that this will cost around $19bn. Brazil has 54 400 km² of sugar cane
under cultivation and that will rise by around 26 000 km² over the next
six years.

There’s plenty of available land in Brazil on which to grow sugar cane.
Environmentalists are also less concerned about cane cultivation
encroaching upon the Amazon rain forest, as the jungle conditions render
that land unsuitable for growing sugar cane.

Though India’s sugar production will increase substantially over the
next few years, its export potential could be limited because of greatly
increasing internal demand for sugar.

The only real threat to a sustained rise in the world sugar price
appears to be a significant fall in petroleum prices. T hat is only a
remote possibility.

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