Higher supply deficit and lower sugar production in Brazil leads to rising sugar price

The raw sugar price climbed by around 1.5% to a six-week high of $12.5 per pound yesterday. One reason for this was the International Sugar Organization (ISO) revising its estimate for the global market deficit in the 2015/16 season (which begins in October) slightly upwards by 200,000 tons to 2.5 million tons. 

The ISO only expects to provide a more precise breakdown of its estimate in August. At the same time, the director of the Brazilian Sugarcane Industry Association (Unica) prepared the market for a possible reduction in sugar production in Center-South, the most important growing region which accounts for 90% of Brazilian production. 

Despite an increased sugar cane crop, sugar production could fall short of the previous year by over 1 million tons. Previously, production had been expected to achieve roughly the same level as last year's figure of 32 million tons, says Commerzbank. 

Now, however, data from the roughly one-third completed harvest indicate that the ongoing shift towards converting more of the cane into ethanol rather than sugar is even more pronounced than previously thought, meaning that sugar production to date is 13% down on the year-on-year figure.

There is considerable demand for ethanol in Brazil, as a large number of so-called flex-fuel vehicles is used there which can run on either gasoline or ethanol. By increasing duty on gasoline, the government has made ethanol a more attractive substitute.