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.
[caption id="attachment_55659" align="alignright" width="300"
caption="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"]
[/caption]
Using gigantic plantation operator Bunge (
BG
,
quote
) 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
,
quote
) 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
,
quote
).
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
,
quote
), 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
,
quote
) 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.
