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May 2002

World Sugar Situation

Summary

The outlook for the world sugar market indicates continued downward pressure on prices in late 2001/02 and early 2002/03. Revised production estimates for the remainder of the 2001/02 season indicate an increased output; and forecasted production for the upcoming 2002/03 season indicates a possible record. Even though consumption remains firm, import demand may slacken as principal importing countries of Russia, Ukraine, and China look to reduce imports in the face of increasing domestic production. The forecast EU production increase, by itself, will take up most of the consistent but moderated increase in world consumption. Added to that, increased production in the other exporting countries - Brazil, Australia, and South Africa - may put downward pressure on prices.

Throughout the fall and spring of 2001/02, world refined sugar prices, as expressed by the London Daily Contract No. 5, remained firm and, in fact, on a monthly average, strengthened. Viewed broadly, over the long term, refined prices over the last 6 months generally were comparable if not better than those of the preceding 3 years. This strengthening may have been in response to the lower output of refined sugar by the EU, and to a steady demand for refined imports in Eastern Europe, Africa and the Middle East. However, during the last 3 months, refined prices have softened from those of last summer and early winter joining the downward movement of raw prices, as expressed in the spot Caribbean No. 11 contract. Lower prices are a reaction to higher-than-expected production for the 2001/02 season and to expectations for further increases forecasted for the 2002/03 season.

Aggregate production for 2002/03 in the four principal exporters - the EU, Brazil, Australia, and South Africa, - is forecast to increase by 4.8 million tons or by 11 percent from the 2001/02 season. Revised production for 2001/02 and forecasted increased production for 2002/03 in China and Russia is sure to disappoint exporters. These two countries together accounted for about 17 percent of total 2001/02 world imports, and shippers were hoping these markets would assume an increasing share of world imports. However, production in these countries is forecast to increase (by a total of 350,000 tons or by 3 percent over 2001/02 production). Consequently, a portion of the new supplies coming onto the market must find a home in other markets. Hopefully, any downward pressure on prices may offer increased incentives for imports in African, Asian, and Middle Eastern nations and increase shipments to those countries. These regions are important because imported sugar accounts for a significant portion of their consumption. Sugar remains a principal source of inexpensive energy and is attractive when compared to alternative commodities. Import demand for sugar in African countries, which as a group accounts for about 14 percent of world imports, may well increase should the price remain low and if drought conditions continue, causing an increased demand for low cost high energy commodities.

Over the last 10 years, world consumption grew at a fairly steady pace of about 1.9 percent per year. Domestic demand for sugar in 2001/02 remained steady, increasing 1.3 percent from the previous year. Forecasted 2002/03 world domestic consumption is set at 133.4 million tons, up 1.4 million tons from the current estimate for 2001/02. Consumption is growing fastest in Asia, with India leading this group and Korea and Malaysia also showing significant increases. Nevertheless, it appears that worldwide economic slowdown may be affecting the demand for imports as the overall rate of growth for domestic consumption is showing signs of slowing down.

In addition to the tariff rate quota (TRQ), the U.S. Trade Representative (USTR), also announced that 20,344 metric tons of the refined tariff rate quota not reserved for specialty sugar (13,656 metric tons) or Mexico=s NAFTA allocation (137,788 metric tons) is being allocated in the following manner: 10,000 metric tons (11,354 short tons) is allocated to Canada, and 2,954 metric tons (3,256 short tons) is allocated to Mexico. The remaining 7,090 metric tons (7,815 short tons) of the in-quota quantity may be supplied by any country, subject to any other provisions of the law, on a first-come, first-served basis. The 13,656 metric tons (15,053) reserved for specialty sugars may also be supplied by any country, subject to any other provisions of the law, on a first-come first-served basis.

With respect to the TRQ for certain sugar-containing products maintained under Additional U.S. Note * to chapter 17 of the Harmonized Tariff Schedule of the United States, 58,250 metric tons (65,312 short tons) is being allocated to Canada. The remainder of the sugar-containing products TRQ is available for other counties on a first-come first-served basis.

Total imports of raw and refined sugar from Mexico entering under NAFTA allocation may not exceed 137,788 metric tons (151,885 short tons).

Last year’s sugar production (2001/02) declined by 2.3 million tons, equal to 12.3 percent from the previous year’s level of 18.5 million tons. The reduction is attributed to poor planting, growing, and harvesting conditions throughout the year. Production for the 2002/03 year is forecast at 17.3 million tons, rebounding from last year’s reduced crop.

Due to expectations of low world prices and large Brazilian production, growers may not plant with the intention of producing any more C sugar than usual, specifically directed for exports. However, with plantings designed to ensure that A and B quotas are met even under poor growing conditions (such as last year), normal yield levels will result in higher C sugar production. In addition, with overall production expected to return to normal levels, there is a possibility that the Commission may need to apply a reduction coefficient to A and B quotas as was done in 2000/2001 to make sure World Trade Organization (WTO) commitments are met. The need for such an action will be better known as the growing season progresses, and in any case, a reduction is not expected to be announced before October 2002.

The new sugar regime that went into effect starting in the 2001/02 marketing year, is expected to remain in place until 2005/06. The nature of any future reform is unknown at this time and will have to take into account the increased liberalization of trade vis-à-vis developing countries, WTO negotiations, and accession of to up to 10 new EU member states.

The EU balances supply and demand by managing the C-sugar supplies. Depending on the internal price, the EU either sells C-sugar on the world market without subsidy or carries it over to the following marketing year. As a result of the sharp decrease in production, C-sugar supplies (any amount of sugar exceeding the A and B sugar production quotas) are also expected to be much smaller. Less C-sugar will be carried over this year because producers took advantage of relatively higher world refined sugar prices in December and January to export C-sugar. Also, under the new sugar regime put in place in July 2001, storage re-imbursement is no longer available for quota sugar, so C sugar (which becomes A sugar when carried over) is more costly to store.

Total C-sugar production is estimated at 1.915 million tons raw sugar equivalent, down 63 percent from 5.180 million tons in 2000/2001. Of this, 421,756 tons will be carried over to 2002/03 (counting against next year=s quota production), and 1,493,538 tons is to be exported.

Brazil

Total Brazilian sugarcane for marketing year 2001/02 (May-April) is revised upward to 293 million tons. Regular rainfall in the Center-South region during August-October 2001 increased the yield of "annual" cane varieties, and resulted in a higher volume of sugarcane ready for harvest. Brazilian sugarcane production for marketing year 2002/03 is projected at a record 334 million tons, up 14 percent from the previous crop. The 2002/03 Center-South crush is projected to start early and may well extend into January to accommodate the expected increase in sugarcane availability. Total marketing year 2001/02 Brazilian sugar production is revised upward to 20.35 million tons (raw value), up 3.25 million tons from the previous crop due to higher than initially expected sugarcane production and the ongoing shift towards sugar production, rather than alcohol. Total Brazilian sugar production for marketing year 2002/03 is projected at 22.95 million tons, up 2.6 million tons relative to marketing year 2001/02. This assumes the Government of Brazil maintains the alcohol content in domestic Agasoline@ at 24 percent (set January 10, 2002). Sugar consumption is forecast for the 2002/03 marketing year at 9.65 million tons, up 200,000 tons from the previous season. Brazilian sugar exports for marketing year 2002/03 are forecast at13.5 million tons, up 2.15 million tons from the previous year. In spite of declining international prices, approximately half of the export contracts for the coming 2002/03 season have already been set, guaranteeing profits. Brazil is expected to export approximately 700 million liters of alcohol in marketing year 2002/03, up 250 million liters from the estimate for 2001/02. Major destinations include South Korea, Japan, and Jamaica.

Although the Mexican sugar industry has not yet set a sugar production estimate for marketing year 2002/03 (November - October), USDA is forecasting sugar production at 5.3 million tons, raw value. This forecast is based on the relatively good weather experienced during the growing season. However, it also assumes that the 27 expropriated sugar mills will continue normal operations under government management. It is expected that the new National Sugar Policy will enable the sugar industry to have access to more credit lines in order to alleviate cash flow problems, finance sugar stocks, and mechanize sugar production. The overall objective of the National Sugar Policy is to help Mexico=s ailing sugar industry by regulating the sugar sector and making it more profitable. The National Sugar Policy announcement did not contain any information about the future of the government-owned sugar mills nor the timing of their privatization. Despite these inducements to continue producing high price sugar, the area planted to sugarcane is forecast to be similar to last year’s level. Industry financial problems and low international sugar prices do not allow for an increase in area planted.

Sugar consumption for marketing year 2002/03 is forecast to remain flat at 4.61 million tons, unless imports of High Fructose Corn Syrup (HFCS) are restricted. The sugar industry maintains that domestic sugar consumption has remained almost flat because of increased usage of both domestic and imported alternative sweeteners. In the event that Mexico complies with the world Trade Organization (WTO ) ruling and lifts the HFCS compensatory duties, marketing year 2002/03 sugar consumption might decrease compared to marketing year 2001/02. Sugar consumption for marketing year 2001/02 is revised upward to 4.61 million tons. Sources indicate that refined sugar consumption by the soft drink industry for 2001 was approximately 1.2 to 1.4 million tons. Sugar consumption for 2002 could increase about 250,000 to 300,000 tons should the industry stop using HFCS. The soft drink industry indicates that a very small growth in soda consumption is expected for 2002; therefore, it will have to keep its prices competitive to maintain market share. Sugar consumption for marketing year 2000/01 remains unchanged at 4.54 million tons.

China

Area planted to both sugar cane and sugar beets increased in marketing year 2001/02. These increases, combined with good weather conditions in cane growing areas, led to an overall increase in sugar production. Growth in planted area was largely the result of strong sugar prices, which reached a record high of $548/tons in April 2001. However, prices began to decline in October as the larger crop entered the market. By the end of the calendar year prices fell to $331/tons. Over the long term, prices are expected to fall even further.

Increased production of both cane and beets is the main reason for an estimated 28-percent increase in sugar production, totaling 8.8 million tons for marketing year 2002. Sugar production for 2002/03 is forecast to climb to nearly 9 million tons. Sugar refineries have been the primary beneficiaries of high prices, with Guangxi reporting that 60 percent of previously money-losing refineries are now making a profit. Total profits for the sugar refining industry reached $204.8 million, with tax receipts of $360.1 million. Earlier in the year the government attempted to bring prices down, by auctioning an estimated 1.45 million tons of stocks. However, as domestic production continues to rise and prices fall, the government announced a National Reserve Procurement Plan with the initial intention to purchase 300,000 tons of sugar.

Sugar imports for marketing year 2000/01 amounted to 1.08 million tons, including 875 tons of raw sugar and 208 tons of refined sugar. This figure is an increase of 57 percent over imports during marketing year 1999/2000. For marketing year 2001/02, imports are estimate to increase modestly to 1.1 million tons, but this may be more than offset by an increase in exports of refined sugar. As a condition of its entry into the WTO, China agreed to an initial TRQ of 1.76 million tons for sugar. However, imports are unlikely to hit this level as issuance of the quotas continues to be delayed. There is also a great deal of uncertainty as to how the TRQs will be administered, including rumors that a significant portion of the TRQ will be reserved exclusively for tolling operations. Furthermore only 30 percent of the quota is allocated to private traders who reportedly are reluctant to import given the current domestic situation.

Over the long term, however, government policy favors increasing the concentration of cane production within the current main production areas. Concentration of production and increased integration within the refining industry are key elements of the government=s effort to streamline the industry in preparation for greater competition under the WTO.

India

Total centrifugal sugar production in marketing year 2002/03 is forecast at 18.6 million tons, down 4 percent down from the 2001/02 estimated production of 19.4 million tons. The marketing year 2002/03 figures include 683,000 tons of khandsari, a low recovery centrifugal sugar. Gur (crude non-centrifugal sugar) production is forecast to climb to 6.6 million tons from 6.5 tons in 2001/02. Despite large sugar stocks and delayed cane payments to farmers during the 2001/02 season, 2002/03 cane planting intentions remained favorable due to comparatively firm cane prices vis-a-vis competing crops. However, as winter plantings in Maharashtra, Gujarat, and Karnataka were adversely affected by dry/warm conditions, 2002/03 sugarcane area and production are expected to be marginally lower at 4 million hectares and 272 tons, respectively.

Due to a lower-than-anticipated diversion of cane for production of alternative sweeteners (gur and khandsari), estimated 2001/02 centrifugal sugar production has been raised to 19.4 tons. The diversion of cane to alternative sweeteners was largely limited by depressed gur prices. High cane prices and a stagnant market for molasses further squeezed the profit margins of other sweeteners. Recent communal violence in the state of Gujarat, a major market for gur, further depressed the demand for gur, adversely affecting the prospects for late-season (March onwards) diversion of cane toward these sweeteners.

Marketing year 2001/02 sugar exports are estimated at 450,000 tons of sugar through March 2002 with prices ranging from $215-$240/ton, FOB. Most exports have been by southern mills due to their internal transportation advantage of rupees 600-800/ton ($12-$16) over the north India mills. In the new Export-Import policy announced on April 1, 2001, the government declared that it will provide internal transport subsidies (mill to port) for exports of agricultural products, including sugar. This subsidy is paid out of the Sugar Development Fund created from the market excess of rupees 140/ton levied on domestic sugar. Despite the subsidy, trade sources do not expect significant shipments during the remainder of the current marketing year, due to the impending arrival of cheap Brazilian sugar, expected to lower world prices to $180-$210/ton. Consequently, the marketing year 2001/02-export estimate has been lowered to 850,000 tons. Based on revised estimates from Indian Sugar Mills Association, marketing year 2000/01 exports are put at 1.4 million tons.

During 2001/02, Russia produced 1.6 million tons of sugar from domestic beets, its highest level since the 1996/97 marketing year, and 3 percent more than the previous year. Better harvests due to good weather and increased area planted are major reasons for increased sugar output. Domestic production is expected to continue due to Russia=s protective sugar import policy, which fosters domestic investment into sugar production. Russia is forecast to produce almost 1.7 million tons of white sugar from domestic beets and 4.4 million tons from imported raw sugar during the 2002/03 marketing year.

Although Russia=s sugar regime cannot completely restrict imports to the level of the TRQ (3.65 million tons), it has effectively reduced the rapidly increasing imports that occurred over the last few years. During 2001/02, total sugar imports are expected to fall approximately 15 percent from the previous year’s level to 4.8 million tons. Imports for 2002/03 are forecast to fall again to 4.5 million tons. During 2002, Russia is projected to import almost 1.0 million tons in excess of the raw sugar TRQ B a pattern that is expected to continue, given the volatile nature of world sugar prices. When world prices fall to extremely low levels, imported sugar becomes competitive despite the restrictive TRQ system. Consequently, the Russian sugar industry is pressuring the government to consider new measures to further protect the market, as well as adopt mechanisms to keep imported cane sugar from being competitive at any price during the local harvesting and processing season. For example, because the government cannot offer significant financial support to the industry, the domestic industry would like to see a more prohibitive import duty on all sugar imported outside the 3.65 million ton quota.

Russia is expected to continue the TRQ and seasonal duty system first introduced in July 2000. Under the current regime, in-quota raw sugar is subject to a 5-percent, but no less than 0.015-Euro/Kg duty; while out-of-quota imports are subject to a 40-percent, but not less than 0.12- Euro/Kg duty.

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Last modified: Sunday, March 17, 2013