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ANALYSIS: Sugar cauldron bubbles on, delighting investors

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Severe drought has affected Thailand’s 2019-20 sugarcane production - Fitch has now downgraded its forecast from 13.5m tonnes to 9.8m tonnes, thanks to the worst drought in four decades. Thailand could see its sugar production this season slump by more than 30% from its 2018-19 output.

 

Cane production is likely to fall below 90m tonnes, from about 130m tonnes in the previous season. According to Sirivuthi Siamphakdee, vice-chairman of the Thai Sugar Millers Corporation: "This will likely be our worst season in five years."

 

A delayed and short monsoon, below average rainfall, and abnormally high temperatures have exhausted Thailand’s reservoirs. Added to that, low world sugar prices for the past three years have discouraged farmers from the necessary husbandry.

 

It could take years for the Thai sugar sector to recover back to previous levels.

 

Brazil needs to deliver a bumper crop

 

Fortunately Brazil’s Centre South crop seems to be in good health, and reports are that the cane is looking good.

 

A consensus is emerging that cane production there will be some 600m tonnes (against last season’s 575m tonnes). Yet weather conditions will need to be ideal, with sufficient sunshine during the winter months of May and July to encourage the cane to produce sucrose.

 

Given the best conditions, Brazil could produce an additional 11m tonnes of sugar.

 

News from India about its own sugar crush in the key state of Maharashtra is that it has so far yielded about 17m tonnes of sugar, more than 20% lower than last year.

 

It’s a precarious position.

 

There’s probably more to come in the price rally

 

We are still some way from the average closing price of 18.2 cents per pound seen in 2016, an average of more than 28% up on the previous year.

 

What complicates the outlook is the ’swing’ factor of ethanol production in Brazil, which itself depends on many factors, not least the ratio between pump prices for gasoline and ethanol in Brazil. Currently it looks as if the market has shifted to a new and wider range, with a firm basis around 13 cents per pound.

 

One thing is sure - the price recovery will induce a positive response from farmers. But that will be too late to crush prices this year.

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