Sugar high coming to an end for producers

Markets Update: Sugar prices are headed downwards, giving sweet-toothed investors cause for cheer.

Traders have enjoyed something of a sugar high recently, as the sweet tooth of many emerging market economies has been a boon for sugar producers.

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But like a child who has eaten too many sweets, a supply glut is giving sugar producers a headache as prices fall.

Sugar has fallen 22.3 per cent to 23.21 US cents per pound since highs reached in July, and analysts are predicting further declines.

Although bad weather in Brazil has led to falling production estimates at the world's largest sugar producer and had sparked a recent rebound on sugar markets, Capital Economics is forecasting a further drop in sugar prices next year.

The firm expects prices will drop to about 20 per cent lower than current levels, analysts wrote in a research report.

A boost to world production as Ukraine and Russia shift from net importers to net exporters is expected to push prices down further, as will stabilising demand from China.

"Despite a rapid increase in China's sugar consumption over the last decade, its net imports have been fairly stable … and are well below their historic peak," the report added.

Banks agree the increased production will cut short the recent bounce in prices. Morgan Stanley expects sugar at 22 cents for 2011-2012 and 19 cents the following year, while analysts from Goldman Sachs anticipate sugar prices at 22 cents per pound.

"A good monsoon will likely support India's production and points to a potentially large increase in exports while concerns for supply losses in Thailand following the floods are easing. A bumper production in Russia, Ukraine and EU should finally weigh on sugar prices in coming months," the analysts wrote in a research note.

The declining value of the Brazilian real - down 10 per cent against the US dollar this year - may also offset falling supply, although an open question is the price at which Brazilian producers will switch to ethanol.