Food and beverage firms exposed to high sugar price risk

Report warns food and beverage companies exposed to high sugar price risk

Sugar prices have been rising for six months and are expected to remain firm in the near to medium term, exposing food & beverage (F&B) companies to a high price risk, says a Rabobank report, issued recently.

“World raw sugar prices have risen by 30 per cent since mid-April, from 14.3 US cents per lb (pound) to 18.8 US cents per lb (basis July futures), as the market started factoring in potentially lower global sugar output in 2016­-17,” goes the report.  Adding: “Domestic prices across Asia have also started to reflect tighter fundamentals. A higher price trend is likely to persist over the next few quarters and will have substantial impact on Asian F&B corporate margins.”

At present, the global price for sugar futures is 20.61 cents a lb for benchmark futures contracts. Some Indian sugar companies and beverage & confectionery makers have discussed contractual arrangements for supply. Earlier, after the government liberalised the sugar release mechanism and partially decontrolled the industry, this opportunity was made available but the sugar market entered a bear cycle in this country and contractual arrangements didn’t pick up in a big way. With prices falling, keeping positions open was considered beneficial.

The report says Asia is to experience its first sugar deficit in a little over five years. Production in Asia is expected to be significantly lower in the 2016­-17 sugar season, as the 2015 drought pulled output down to a five-year low. India, the world’s second largest producer, will see a fall in production by 3.7 million tonnes (mt), due to droughts in 2014-15 and 2015-16, and will become a sugar importer in 2016-17 (the sugar season begins in October), says the study.

For 2015-16, Rabobank is forecasting an Asian deficit of two mt. On a global level, while Europe and Brazil are forecast to see improved production next year, Rabobank is expecting a world deficit of 5.5 mt in the next sugar season.

The report says soft drinks have been a critical volume driver for Asian sugar consumption. While predictions for soft drink consumption growth in Asia have been lowered, Rabobank projects growth to remain ahead of most other regions. Dairy (mainly condensed milk and ice-cream) and confectionery are other key segments and expected to grow at a stable rate in the near future.

For F&B segments with significant exposure to sweeteners, overall Asia growth was 8.5 per cent a year, versus the global growth of three per cent, between 2006 and ­2015. Despite recent slowing in the Chinese F&B market, Euromonitor predicts that 40 per cent of the global volume growth during 2015-­18 will come from the Asian F&B market. India is also the world’s largest sugar consumer and “remains one of the fastest growing markets for non-household sugar, with confectionery and soft drinks being the two key sectors driving consumption.”

As the largest consuming sectors, processed fruit-based products, confectionery and the traditional sweet-making industry will continue to drive absolute volume growth.” The twin impact of sustained demand and lower 2015-16 production has pulled Asian sugar inventory to historic lows. Prices in the region have increased by 30-50 per cent from levels seen in calendar year 2015.

With subdued 2016-17 production expected and sustained growth in demand, Rabobank estimates there is enough to support current price levels till the fourth quarter of 2016, when there will be further information on the season’s supply­demand balance.

Further, the report said: “In India, domestic prices have risen quickly over the past six months, and if downstream users are slow to react, it could mean a ballooning in costs and a squeeze to profit margins.”
PRICE PINCH

• World raw sugar prices have risen by 30% since mid-April as the market started factoring in potentially lower global output in 2016-17
   
• A higher price trend is likely to persist over the next few quarters and will have substantial impact on Asian F&B corporate margins, states the report
   
• Asia is to experience its first sugar deficit in a little over five years; India— world’s second largest producer,will see a fall in output by 3.7 mt