China's sugar price: easy to rise not to fall in 2015-16 extracting season 03-14-2016

In 2015/16 extracting season when the sugar production is to be decreased in China, the sugar price as a whole will be easy to rise instead of fall. However, other factors should be paid attention to, such as imported sugar, currency and international crude oil.

The Chinese version was written by Zhang Zihai, from Avic Futures Co., Ltd.

Mainly, commodity price is decided by supply-demand relationship. Since there is rigid demand for agricultural produce, the change in supply-demand balance, will play a more significant role in impacting their prices.


  • China's sugar output to be cut down

    • In 2015/16 extracting season (October 2015-September 2016), the sugar (cane sugar + beet sugar, 90%+ of cane sugar) production is expected to decrease, by 5% YoY to around 10 million tonnes, mainly due to the fall of sugarcane output. In November, big sugar production provinces/ regions released self-discipline agreements, to restrict the sugarcane extracting enterprises to conduct cross-regional procurement of sugarcane. This also has a clear indication that the sugarcane production is largely cut down. In view of the historical trend, the domestic sugar production generally goes through 3-year growths, and then gets into 2/3-year declines. Correspondingly, the sugar price fluctuates: downturn during output growths and upturn during output falls.

    Forecast on sugarcane/beet planting and sugar output in China, 2015/16 extracting season

    Region

    Planting area, ha

    Procurement, million tonnes

    Sugar output, million tonnes

    Hainan Province

             30,000

                       1.20

                  0.15

    Guangdong Province

            117,333

                       8.00

                  0.75

    Yunnan Province

            337,333

                      16.55

                  2.10

    Guangxi Zhuang Autonomous Region

            800,000

                      48.00

                  6.00

    Others

             26,667

                       1.20

                  0.15

    Cane sugar (subtotal)

          1,311,333

                      74.95

                  9.15

    Xinjiang Uygur Autonomous Region

             61,333

                       3.70

                  0.44

    Inner Mongolia Autonomous Region

             45,333

                       2.00

                  0.25

    Hebei Province

             14,000

                       0.60

                  0.09

    Heilongjiang Province

              4,667

                       0.10

                  0.01

    Others

             10,000

                       0.48

                  0.06

    Beet sugar (subtotal)

            135,333

                       6.88

                  0.85

    Total

          1,446,666

                      81.83

                 10.00

    Source: China Sugar Association


    • International sugar output below expectation

    In the international market, Brazil (largest sugar production country) and India (second largest production country) play an important role in impacting the supply.


    On 17 Dec., 2015, the CONAB (the national commodity supply company under Brazilian Ministry of Agriculture) stated that influenced by the drought caused by El Niño phenomenon, Brazil is expected to produce 34.60 million tonnes of sugar in 2015/16 extracting season (April 2015-March 2016), lower than the expected 37.30 million tonnes in early August. Specifically:
    • Central and southern Brazil: 31.30 million tonnes < 33.70 million tonnes expected in August
    • Northern and eastern Brazil: 3.30 million tonnes < 3.60 million tonnes expected in August

    As reported by ICRA (= Indian Credit Rating Agency), India will see a fall of 4.62% in sugar production, to 26.80 million tonnes in 2015/16 extracting season (October 2015-September 2016). In 2014/15, the figure was 28.10 million tonnes. This prediction is higher than the government’s (= 26 million tonnes), but lower than industry association, ISMA (= Indian Sugar Manufacturing Association)’s (= 27 million tonnes).



    • Other factors impacting China’s sugar price

    Currency

    In mid-December 2015, the United States Board of Governors of the Federal Reserve System decided to increase the federal fund rate, by 0.25 percentage point. This, basically, is in line with the market expectation, having no distinct impact on the global financial market. However in 2016, if the USD interest rate is increased largely and frequently, which is beyond expectation, it will significantly act on the financial market.


    Now the Brazilian economy is in depression - currency BRL is depreciating. On 24 Dec., the USD/BRL exchange rate was 3.9511, up by 48.78% over that of 2.6556 on 31 Dec., 2014. The BRL depreciation is favourable for Brazil’s sugar export. Further, the global supply will rise, possibly leading to decrease in international raw sugar price.


    Crude oil

    The international crude oil price also has indirect effect on sugar industry. For instance, Brazil is a major sugarcane-based ethanol production country in the world - the cane sugar production is connected with the ethanol output. This means that the international crude oil price will also indirectly work upon the sugar yield.


    Specifically, the crude oil index at NYMEX (=New York Mercantile Exchange), decreased by over 40%, from USD64.07/bbl on 6 May to USD37.70/bbl on 21 Dec. In the future, close attention should be paid to whether the international crude oil price can stay at over USD35/bbl, which will push up the international raw sugar price.


    Imported sugar

    When the international raw sugar price decreases, the profit from processing imported raw sugar will increase. This will attract domestic enterprises to increasingly import raw sugar and finally will exert pressure on the domestic-made sugar price growth. By 24 Dec., 2015, the processing profit in China was USD245/t (RMB1,566/t), still at a high level since 2011. Specifically, the highest this year was in mid-June, over USD375/t (RMB2,400/t).


             


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