Raw Sugar Future Trade Triple as Global Sugar Production Fell

Raw sugar futures traded in New York tripled in the past year as global production fell short. Demand in India, the world?s biggest user, rose 13 percent in four years while output was little changed, according to the U.S. Department of Agriculture. In Brazil, the biggest producer, sugar output climbed 25 percent over the same period, the USDA says.

Global sugar production will probably exceed demand by at least 9 million tons for the 2011-12 season, the second surplus in a row, Rabobank estimated in a report yesterday.

EU beet growers will harvest 17.26 million metric tons in the 2011-12 crop year starting Oct. 1, the largest since 2005- 06, and up from 15.2 million a year earlier, Rabobank International estimates. Supplies will increase as farmers boost plantings by 4 percent to 3.89 million acres, according to the European Commission, the executive arm of the 27-nation EU. The European Union?s sugar-beet crop, the world?s largest, will be the biggest in six years, at a time when Nestle SA and other food companies say supplies are running short.

The EU spent four years shrinking the sugar beet industry after a World Trade Organization ruling that limited exports. Importers approved to ship to the EU were able to sell sugar for more elsewhere as global prices soared. That left food companies without enough supplies, Nestle says.

?I don?t think anybody had this in mind when the policy was changed,? said Gorjan Nikolik, an analyst at Rabobank in Utrecht, Netherlands. ?Nobody at all imagined at that time that Europe would not be a good place to send sugar.?

The EU began paying sugar factories to shut in 2006, in a bid to cut production and support prices. Tate & Lyle Plc, after 132 years in the business, sold its EU refineries last year to American Sugar Refining Inc. Danisco A/S, based in Copenhagen, sold its sugar operations in 2009 to Braunschweig, Germany-based Nordzucker AG.

?Major Issue?

?There is a major issue in the EU of not being enough sugar available to meet demand,? Vevey, Switzerland-based Nestle said in a statement on Aug. 13. ?Sugar reform has been based on the assumption that world sugar prices would remain lower than prices in the EU which has not been the case. Consequently, the EU sugar market is not functioning as foreseen.?

Nestle is the world?s biggest food company and uses sugar in products such as KitKat chocolate bars and Haagen-Dazs ice cream.

R&R Ice Cream Plc, Europe?s largest private-label producer of ice cream, expects prices for sugar-based foods in the EU to rise 20 percent by April because of higher costs of the sweetener, Chief Executive Officer James Lambert said Aug. 15. R&R buys about 50,000 tons of sugar a year, including 10,000 tons from the U.K., he said.

Shortages of sugar were caused by decreased output last year after an early freeze and reduced imports the prior year, said Roger Waite, a spokesman for the commission.

?One-Off Year?

?What we?ve seen is a one-off year, we hope anyway, where supply has been difficult to find and supply from the least- developed countries has been lower than normal,? Waite said. ?We don?t think that?s a structural problem.?

Raw sugar in New York, a global sugar benchmark, may drop to 21 cents a pound in the next 12 months because of the increased supplies, said Keith Flury, an analyst at Rabobank in London. Goldman Sachs Group Inc. forecasts the price may fall to 20 cents a pound in 12 months, it said in an Aug. 11 report.

Sugar Prices

Raw sugar for October delivery dropped 0.95 cent, or 3.2 percent, to 29.23 cents a pound by 12:244 a.m. London time on ICE Futures U.S. in New York. Prices have jumped 46 percent in the past year on signs of crop damage in Brazil.

The EU sugar beet crop was 10 percent smaller last year because of frost, according to the USDA. That pushed up sugar prices as much as 70 percent in some parts of the EU, Rabobank said. Buyers in Poland where sugar is in short supply reportedly went to Germany for sweetener to resell it at home for a profit, Rabobank said in May.

To boost supplies, the EU authorized more sugar imports at zero duty. White, or refined, sugar was selling in Europe at about 517 euros ($745) a ton in March, more than the EU?s reference price of 404.40 euros, spurring the EU to take market action to boost supplies, said Nikolik.

?The most important thing was refiners and sugar buyers were saying we can?t find sugar,? he said. ?The price premium is just one indicator. But you don?t need an indicator when people are saying we?re not able to find sugar.?

Reference Price

The reference price is the basis for negotiations with importers and the sale of intervention stocks that are used by the government to balance the market in times of shortage or surplus. The reference price replaced the support price before sugar reform and was the guaranteed price the government mandated for sales.

The WTO limited EU exports to 1.35 million tons a year. Last year, the EU limited its exports to about 600,000 tons.

?Most of the extra production for this year will go into exports, and some will go into storage and also some will be produced into ethanol and used in the industrial sugar market,? Nikolik said. ?Domestic sugar users for human consumption will not be able to benefit from this strong production.?

France, the EU?s biggest sugar producer, will have a record yield of 15.4 tons a hectare (2.47 acres), and the U.K.?s crop will be 20 percent larger, Rabobank said in yesterday?s report.

Robert Baker, 48, who farms 2,000 acres of sugar beets, wheat, rapeseed and barley in Bury St. Edmunds, England, says he?s sticking with the beet crop because it?s made a ?sensible return. We don?t want to give up that security.?

After losing 10 percent of his crop last year, this year?s weather resulted in ?pretty much ideal growing conditions,? Baker, who has been farming for 25 years, said. The sugar beet harvest ?looks about as good a crop as we?ve ever grown.?