Sugar was one of the most dramatically increasing commodities worldwide, related to a growing demand and lack of sufficient growth in production. Although production in Brazil and India has noticeably bounced back from the COVID-19 pandemic, there has been a clear decline in production in European Union countries.
Sugar production in India and Brazil varies from that in Europe; in the former, sugar is produced from sugarcane, and in the latter, from sugar beet. Although the product is interchangeable, global turbulence and decisions have led to prices being nearly twice as high as at the beginning of 2020. Hopes that sugar may get cheaper have been sparked by actions of the Indian government. However, it seems these actions only have a very local impact. So can we not expect a drop in this commodity’s price?
India aims to lower prices
It has been long known that political victories and defeats are mainly determined by whether citizens have more or less money in their pockets. Usually, announcements regarding various regulations have little significance for the majority of the population. The same is true for the most populous nation in the world, with over a billion inhabitants and also the largest democracy, India. The current government strives to dramatically lower the price of crucial products in the country, such as onions and sugar. Authorities have forbidden the export of onions and the use of sugarcane for the production of ethanol, which is an increasingly important biofuel worldwide. Additionally, the national food company will be conducting additional wheat sales every week. Significant reductions to key agricultural product prices have allowed inflation to decrease below 5% annually as of October. General elections in India will be taking place around April and May, and the current leadership, led by Narendra Modi, does not want to give up control, which has remained unchanged for the past few years.
Significant price increases in Europe
Sugar production is one of the most energy-intensive processes in the food industry. Additionally, in Europe, the majority of production uses gas, which still remains relatively high compared to prices seen prior to Russia’s invasion of Ukraine and the limitation of supplies to European countries. When gas prices reached 300 EUR per Mwh, many companies cut production and there was also a decrease in cultivation. This is not the end though. EU authorities’ efforts to limit the use of various chemicals for cultivation could reduce production and significantly increase production costs, something some entrepreneurs believe could threaten sugar beet cultivation. Already, we are witnessing that the average price in Europe in October rose to 850 EUR per ton, often exceeding 1000 EUR per ton in many countries. This is over a 130% increase compared to early 2020 and is significantly larger than the American benchmark or prices in India, which only slightly curbed a 3-year price increase.
The renowned benchmark worldwide is sugar from the United States, even though this country only ranks sixth in terms of sugar production globally. The top three are Brazil, India, and the European Union. The American price reached 28 cents per pound this year, the highest level since 2011. In response to actions by the Indian government and the rebound of production in Brazil, prices fell nearly 30% to 20 cents per pound. Although a continued decrease in the short term cannot be ruled out, it seems likely that the price trough may be near. Indian authorities are already slightly reducing restrictions concerning sugarcane allocation and granting sugar factories some freedom. What’s more, it is expected that the ban on producing ethanol from sugarcane will be lifted in the first quarter of next year, but export restrictions will remain, which will not assist the tight market in Europe. In such a case, it could turn out that the currently observed global price decrease may not last in the long term, unless a larger crisis resulted in a consumption collapse, as was temporarily the case during the COVID-19 pandemic.
The increase in sugar prices in European countries has been one of the largest worldwide, but at the same time, it is being mitigated by a fairly strong increase in the import of Ukrainian sugar by EU countries, which abolished duty on this commodity at the time of Russian aggression towards Ukraine. Sugar factories fear an increased negative impact on prices, although looking at production prospects in EU countries and the desire to limit the import of Ukrainian goods, we should not really expect a drastic drop in sugar prices on shop shelves. If the price often exceeds 7 PLN per kilogram now, we cannot expect a price drop to around 3 PLN, which we saw as recently as 2021. Nevertheless, to see a price increase to around 10 PLN per kilogram, we would need to see a significant production decrease in Brazil and India, which is not entirely out of the question, considering the rampant El Nino weather phenomenon causing widespread droughts in many parts of the world.
Author: Michał Stajniak, Deputy Director of XTB Analysis Department
