Analysis: why is sugar supply under threat?

04 December, 2010
With sugar supply short and prices set to soar, UK bakeries face a real dilemma, finds Andrew Williams

Commodity price spikes are one thing – bakers have grown used to those. But price rises in flour, butter, cocoa – you name it – pale into insignificance next to the threat that sugar supplies will run out in the UK and eye-watering prices are on the way.

World market sugar prices reached a 30-year high in November and this will be the third year that global production/consumption has been in deficit. Of course, most of the sugar consumed in Europe is produced in the EU, which still operates import tariffs. In the EU, of the 16.5m tonnes consumed, 13.3m tonnes comes from European producers. One commodities broker told BB he believed part of the availability problem stemmed from difficulties in securing the imported sugar that makes up the balance, based on world prices and weather affecting crops.

Russia, Brazil and South Africa  have battled hot, dry weather. Meanwhile, Indonesia and Australia have suffered extreme wet weather. The global production response to the price spike in the first part of 2010 has been smaller than first expected. With many harvests now coming to an end, it has become apparent that global availability at 168.4m metric tonnes raw value (mtrv) in 2010/11 will not be enough to meet predicted consumption of 170.8m mtrv.

Caught short

While EU sugar refiners may have covered 90% of their requirement and waited to top up their supplies on the spot market, high prices and availability problems mean they have been caught short. In Europe as a whole, there is not enough sugar to cover contracts and this will affect every-
thing from sugars to syrups.

“Weather conditions have caused a lack of volume, and production (of sugar) has not been as much as people were anticipating, which pushed prices up on the world market,” said Eifion Owen, Bako Northern & Scotland’s purchasing manager. “People were anticipating next year would be a decent harvest, but it hasn’t materialised that way.”

To make matters worse, the EU indicated recently that it would be issuing 350,000 tonnes of export licences, meaning that a big quantity of sugar would exit the EU, sending shockwaves through the industry at a time when sugar supplies are running out. The Committee of European Users of Sugar (CIUS), which represents the interests of food and beverage sugar users, has called for this sugar not to be exported and to be made available to EU consumers. Following lobbying, the European Commission’s sugar management committee has postponed this decision until 9 December.

“If this were to go ahead, we believe it would put the market in an increased problem of supply. It’s not a question of price, it’s a question of physical supply. There’s no more sugar available,” said Muriel Korter, CIUS secretary-general. Last month, the Commission suspended its E98/ton import duty to make imports cheaper, but CIUS said this is not enough. Availability is scarce and Tate & Lyle has announced prices will rise by E176 per tonne.

Impact on bakers

So how will this situation affect bakers, large to small? “It’s back to front – the bigger your requirement, the worse it is,” explained Bako’s Owen. “Smaller quantity sugar is probably more competitive than large volumes, because suppliers are scared of getting into a contract they cannot fulfil. There is sugar out there and people can buy it, but they will have to pay exceedingly high prices to import it. Everybody is on the hunt for sugar and trying to get their contracts covered, especially the bigger users, as they are the most vulnerable.”

Volatility is here to stay and problems are unlikely to ease until next year’s harvest, especially as traders remain attracted to foodstuff commodities.

“The market has been volatile and there are differing views as to how much is down to money chasing commodities, and how much is due to genuine shortage,” said John Duffy, chief executive of one of the UK’s largest cake manufacturers, Finsbury Food Group.

“The sugar market has gone through big structural changes (EU Sugar Reform), but this sort of short-term localised spike doesn’t seem to be driven by that. In the short term we have contracts in place, so availability is not the issue. Clearly, it’s another situation of input price inflation on an essential ingredient in bakery and it’s unwelcome. I don’t think that it’s particularly helpful to end-manufacturers to have basic foodstuff commodities subject to speculation. Unfortunately, we cannot control that, so we have to deal with the consequences of it.”

Toby Cohen, head of analysis at brokers Czarnikow, said the outlook for the market remains extremely fragile. “The sugar futures market has fallen from its recent highs and the underlying fundamental trends have strengthened, which suggests that the fall in prices is a function of the unprecedented rise in volatility and global macro risks, as opposed to being a sugar-related event,” he said.

“Given the heightened tension in global markets, sharp falls, as well as rises in commodity values, should be expected – even if these do not correlate on a day-to-day basis with underlying market fundamentals. However, in terms of longer-moving trends, it is very apparent that the market has not resolved the underlying physical imbalance and further supply stress has to be expected.”

 





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