Rabobank: Sugar industry looking towards recovery

World sugar prices are starting to rebound on the back of easing lockdown restrictions and the resumption of the foodservice, with the ICE #11 Raw Sugar futures finishing the third week of June at US12.18c/lb. That's an almost a three cent recovery from April, when prices dropped to as low as US9.21c/lb.

Prospects are also on the improve in Australia. A favourable season is driving production, elevated 2020 regional premiums helping buoy margins, and prospects of a low Australian dollar bolstering export opportunities, the bank says in its report for Q2 2020.

Rabobank commodity analyst Charlie Clack said the bank had now lowered its forecast for global sugar consumption for the year ending October, from flat to a 1pc decline - largely driven by the pandemic's impact in countries such as India, Indonesia and Brazil.

As a result, this would see global sugar stocks declining by less than previously forecast, he said.

Rabobank now anticipated a smaller global deficit of 4.3 million tonnes raw value through the 2019-20 (October to September) season, revised from its previous estimate of 6.7mt raw value.

"Looking ahead, we expect consumption to recover from the pandemic and go back to trend growth in 2020-21, resulting in a 1.7pc increase, and for global production to increase by almost 5pc, driven by a recovery in India and North American crops," Mr Clack said.

Assessing COVID-19's impact on global consumption Mr Clack said sugar consumption during COVID-19 restrictions varied across the world and, although food service outlets were now re-opening, demand was unlikely to return to pre-COVID-19 levels in the near-term.

In the EU and UK the loss of demand in the beverage and dairy sectors, and overall negative economic impact on purchases, had weighed heavily on the sugar sector, he said.

Strict COVID-19 restrictions across India had also led to a drop in 2019-20 consumption of 3.4pc, year-on-year.

"While we anticipate a sharp drop in India's food service sales and consumption in quarter two 2020, this is also a key period for sales of ice-creams, beverages and other sugary snacks," Mr Clack said.

"Rabobank forecasts a recovery in the 2020-21 season in India as behaviours return to a 'new normal'."

In North America, the pandemic appears to have had less of an impact on consumption - with the higher usage of high-fructose corn syrup, rather than sugar, in soft drinks minimising the decline of sugar demand in beverages in the US and Mexico.

Looking ahead, it was broadly agreed that COVID-19 would negatively impact 2019-20 global consumption, but the full extent was very much unknown.

Potential 'second-wave' infection events, the longevity of social-restrictions and the severity of a global recession will all play into consumption, as will consumer behaviour," he said.

Global fundamentals should take higher priority for sugar markets, he said, as the southern hemisphere crush gains pace, and Asian cane crops are underway.

Mr Clack said India's 2020 monsoon season was on time, and at pace, with the favourable season contributing to predicted increase in production - the report forecasting Indian 2020-21 production at 33.5mt, up 16pc year-on-year, if realised.

Indian exports were also strong, despite port congestion and labour issues.

In Brazil, port congestion was set to ease, better positioning the country to distribute a bumper harvest, he said.

"Dry weather has permitted a flying start for the centre/south harvest in Brazil, and by the end of May, 145mt of cane had been harvested, versus 129mt at the same time last season," he said.

"As expected, progress to date shows a pronounced swing to sugar production this season, with 46pc of cane going to sugar production over ethanol, versus 33pc last season."

With the 2020-21 Thai cane crop suffering a poor season due to drought, Mr Clack said the impact was compounded by a likely year-on-year cut in domestic acres, and a lower availability of irrigation water.

As such, he said Rabobank expected Thai sugar output to reach just 8.15mt, down 5pc year-on-year and 47pc from 2018-19.

"Overall, easing Brazilian port congestion, coupled with flowing Australian and Indian raw sugar is forecast to keep 2020 ICE #11 prices confined to the US10.5c-US12c/lb region," Mr Clack said.

"However, we cannot rule out the influence of energy markets, FX and speculators when looking ahead."

With the 2020 crush now underway in northern and central Queensland, with southern and NSW mills scheduled to begin in coming weeks, wet weather delays had dampened early progress in the Burdekin, Herbert and Tully regions.

As a result, crushing pace was some 20pc behind last season and 51pc behind the 2018-19 season. And with above-average rain predicted over coming months a slow 2020 crush - and a late-season finish - was expected, he said.

However, Mr Clack said the favourable season had much improved yield prospects, with Australian 2020 cane production expected to reach 31mt, up 1mt year-on-year.

Australian sugar production was forecast to reach up to 4.4mt, up marginally from 2019.

"While 12-month expectations for the ICE #11 are subdued, below US12c/lb in the 12-month period, demand prospects in Australia's major Asian export markets - namely Korea, Japan, Indonesia - following COVID-19 lockdown will be keenly watched as the new crop flows and is supported by our low Australian dollar," Mr Clack said.

He said the risks of COVID-19 disruption to the Australian crush remained low, following the industry's implementation of measures to prevent virus transmission, as well as a low national infection rate.