EU to join Brazil as key driver of sugar prices

Sugar investors need to gen up on French beet production, and German sugar yields.

The European Union, for years of a relative irrelevance to world sugar prices, is to become one of the "two main drivers" of values, matched only by Brazil, broker Marex Spectron said.

The transformation in Europe's role reflects its change from a bloc with a very regulated sugar market - down to minimum beet prices, and strict trade controls set by the World Trade Organization - to one far more laissez faire, with the abolition in 2017 of production quotas.

"The EU is the one major market which has absolutely no influence on the world market since 2008 but which, we think, is going to become the most important factor in the world market," London-based Marex said.

Range of options

The thinking reflects the greater freedom among EU farmers under the liberalised regime to raise or lower production of beet which, as an annual crop, should see its sowings prove more volatile than can, a perennial, in response to changes in market prices and growers' profitability prospects.

"If the world price is too low, EU farmers can respond by sowing the minimum, and turning the EU into a substantial importer [of sugar]," Marex said.

"If world prices are high enough to incentivise EU farmers to plant the maximum, the EU could again become an annual exporter."

The potential range in trade volumes could be huge, with the bloc - whose own consumption is fairly stable at about 16.5m tonnes - capable of producing 21m tonnes of sugar at full stretch or perhaps 14m tonnes at a minimum level.

"The EU could be an importer of up to 2.5m tonnes, or an exporter of up to 4.5m tonnes."

'Two huge swing factors'

Only Brazil's key Centre South cane producing region offers a comparable range, of 7m tonnes, in theoretical sugar production, given the ability of mills to switch from turning cane into the sweetener or ethanol, Marex said.

"From early 2016 there will be two huge swing factors at work in the sugar market one based on the EU cost of production, and the other on the Centre South Brazil cost of production - and both will be capable of very fast reaction [to changes in sugar prices]."

"All in all, the EU, far from being the passive victim of the world market, will become one of the two main drivers of that market."

The broker estimated EU beet growers' production cost - ie the level at which farmers will receive a profit incentive to grow the crop at about 19-20 cents a pound in sugar terms, with Centre South Brazil's seen at 17-18 cents a pound.

New season begins

The comments come as Brazil's Centre South is beginning its 2014-15 production season, with mills emerging from seasonal downtime, which typically lasts from around December to March, usually rainy period although not this time.

As of Monday, 147 mills had restarted operations, slightly below the 155 starting by April 14 last year, Unica, the Brazilian cane industry group, said on Tuesday.

This represented a turnaround on the end-March situation, when the 22 mills running was higher than the 15 a year before.

Unica said it would on April 23 release its first full estimate for the 2014-15 sugar cane harvest in the Centre South.

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