By Scott Martin
Strong cane harvests in key growing regions like Brazil, India, and Thailand have depressed sugar prices, diverting consumption from food to fuel and heightening pressure on corn syrup and ethanol producers alike.
Crushing sugar cane at a Raízen mill, Brazil: Chopped sugar-cane stalks pass through a series of rollers that crush the cane and squeeze out the juice
Using gigantic plantation operator Bunge (BG) as a proxy on the global sugar market, it looks like there is still more of the sweet stuff than anybody really wants.
Itau agribusiness analyst Giovana Araújo estimates that Bunge is still only tapping 78% of its capacity to grow cane, refine it into sugar (SGG) and further process it into ethanol and other biofuels.
With that kind of supply overhang already on the table, it’s unlikely that BG will be able to get much pricing power in the near term — and since the company has committed to an aggressive expansion of its sugar business over the next five years, the fundamentals don’t get much better farther out.
As it is, sugar buyers that once paid a premium to lock in Brazilian sources are now looking to abundant local harvests to meet their needs.
In India, famously the world’s biggest buyer of foreign sweeteners, local mills are begging the government for permission to export an extra million tons of sugar this year.
The prospect of this gigantic consumer — 23 million tons of sugar a year — returning to self-sufficiency would be bad enough for sugar bulls. Added supply coming onto an already saturated global market makes things worse.
This added sugar can be diverted into ethanol, eliminating destructive demand for relatively expensive corn (CORN).
This seems to be what’s happening. While shares of BG have declined 4.4% in the last two days since the company confessed that its sugar business is soft, Cosan (CZZ), the established leader of the Brazilian ethanol market has barely budged.
Naturally, a glut of raw sugar makes it harder for corn sweetener — already more expensive in some countries — to sell food processing companies on switching from sugar to syrup. Even in applications where syrup is the preferred industrial solution, producers like Corn Products International (CPO) may find it harder to pass on high corn prices.
Here, Latin America is the key region to watch. Latin soda manufacturers have traditionally relied on sugar as a cheap local sweetener, but CPO has been pushing for them to adopt syrup instead.
Analysts previously hoped that CPO would grow its South American revenue as much as 13% this year, but if the company has to absorb its own rising input costs to do so, the growth may not translate into profitability.
As it is, CPO margins are narrowing fast. An unexpected shortfall in U.S. corn harvests would drive input costs higher. A deeper-than-expected drought in the corn belt of Argentina and southern Brazil would make the situation even worse.
We talk a fair amount about sugar as an isolated and irreplaceable commodity. In reality, too much sugar has almost as much of an impact on companies like CPO as too little corn.