Sugar: March quarter 2022

The gross value of production of Australian sugar is estimated to reach $1.5 billion in 2021–22, representing the most valuable sugar crop in real terms since 2016–17 (Figure 1‑1). The high value of production was driven by elevated international prices which rose on the back of tightening global supply throughout the year.

s ABARES estimate. f ABARES forecast. z ABARES projection.
Sources: ABARES

In 2022–23 the gross value of Australian sugar production is forecast to rise strongly to $1.7 billion. Prices are forecast to remain high in 2022–23 due to supply constraints associated with droughts in Central South Brazil (a key producing region) and the availability of key inputs such as fertiliser. The pace of the global economic recovery from COVID-19 will be a key determinant in the gross value of Australia production. For example, there is modest upside potential for this forecast if the AUD depreciates against the USD in 2022–23, or global production falls further in a scenario where the global economy recovers more slowly than expected from COVID-19. This edition of the Agricultural Commodities Report considers both scenarios over the outlook period to 2026–27 (outlined in detail in the Agricultural Overview).

In 2023–24, if improved seasonal conditions in Brazil and easing supply chain disruptions are realised ('faster recovery' scenario), global production is expected to rise more strongly, returning the world to a production surplus. This would result in a fall in the value of Australian production in 2023–24, as excess supply drives down prices. Global markets would stabilise after this period resulting in a value of production of approximately $1.3 billion annually in real terms out to 2026–27.

If the global economic recovery is slower, with ongoing supply chain disruptions, sugar prices are likely to remain higher for longer as oil price volatility diverts global raw sugar production to ethanol, and fertiliser remains less readily available. The value of Australian production would reach a new record of $1.9 billion in 2023–24 ('slower recovery scenario') as Australian canegrowers expand area planted to sugarcane in response to elevated prices. Following a short window of elevated returns to cane growers it is expected that global supply would respond to higher prices, with value of production stabilising converging towards the faster recovery scenario by 2026–27

The value of exported sugar is expected to rise by approximately 30% to $2.1 billion in 2021–22. Increases in export prices and Australian production will drive the rise in value.

s ABARES estimate. f ABARES forecast. z ABARES projection.
Source: ABARES

The value of exports will increase to $2.0 billion by 2022–23 (Figure 1‑2). Increases in export value will stem from higher international prices and higher production. Production is expected to rise on the back of increased area planted to cane in response to high prices in 2021–22.

Should more Brazilian sugarcane be diverted to ethanol, under the slower recovery scenario, there could be a stronger global production deficit in 2023–24 placing upward pressure on prices. This would allow for an additional year of high export values driven by a depreciated AUD and higher Australian production volumes. Following a period of elevated returns, the global production deficit would narrow, driving down international prices and export values.

The average price of raw sugar is expected to rise by an estimated 33% to $538 per tonne in 2021–22. The rise will be driven by lower production volumes in Brazil, and less availability of cheap supply following reduced Indian government support for sugar exports in late 2021.

Australian sugar prices quoted in AUD per tonne are derived from the world benchmark raw “Sugar No.11 Futures” (ICE 11) contract, denominated in US cents per pound. Queensland Sugar Limited (QSL) provides several pricing products, in a pool (derived from the ICE 11) to Australian millers and growers, that allow them to hedge price exposure. As such, Australian prices are heavily exposed to exchange rate fluctuations, international prices and the risk appetite of individual millers and growers.

s ABARES estimate. f ABARES forecast. z ABARES projection.
Source: ABARES

Australian prices are expected to continue their strong upward trajectory and reach a new peak between 2022–23 and 2023–24 (Figure 1‑3). This is due largely to Indian exports remaining unviable below 19.5 US cents per pound, and lower production in Brazil reducing raw sugar availability. Recovering global supply will then begin to place downward pressure on international prices through to the end of the outlook period.

Australian prices are expected to fall in line with projected reductions in the international price over the medium term. However, should the pace of the global economic recovery stall and energy prices remain high, Australian prices could increase for an additional year ('slower recovery scenario'). This would bring prices to $596 per tonne in real terms by 2023–24, representing the highest price since 2011–12. Australian prices are expected to converge by 2026–27 under both scenarios.

Since 2016–17 area harvested and cane production in Australia have been on a downward trend (Figure 1‑4). Over this period, subsidised raw exports from India have flooded global markets, depressed prices and disincentivised investment in Australian sugarcane production. Industry consolidation has also taken place as smaller players exited the industry, decreasing the number of farms from 3500 to 3000 between 2013–14 and 2020–21. The trend of falling production was reversed in 2020–21, with volumes increasing for the first time in five years as wet weather allowed for a healthy crop.

s ABARES estimate.
Source: ABARES; ABS, ASMC

With elevated prices and improved weather conditions forecast in the short term, Australian cane growers will attempt to maximise their gains. As such, area harvested will expand in the short term, increasing raw production volumes, before falling in later years (Figure 1‑5).

s ABARES estimate. f ABARES forecast. z ABARES projection.
Source: ABARES; ABS

Raw sugar production will rise to 4.5 million tonnes by 2022–23 (Figure 1‑6). Production over the period to 2026–27 will then depend on seasonal conditions and global prices. As prices fall, returns to canegrowers will fall resulting in decreases in area planted and lower production volumes. However, should global production stall and prices remain higher for longer, then it is likely that Australian production volumes will remain elevated in the short term. Average seasonal conditions and improved access to fertilisers in the medium term will see production volumes converge to 4.5 million tonnes across both scenarios.

s ABARES estimate. f ABARES forecast. z ABARES projection.
Source: ABARES; ASMC

Global raw sugar supply and exports will increase to 180 million tonnes and 67 million tonnes respectively in 2021–22. In the years leading to 2021–22 volumes had fallen on the back of depressed prices and poor seasonal conditions in key producing nations. This trend was reversed in 2021–22, however, global consumption has continued to outpace supply. As a result, global sugar stocks have been drawn down. This is expected to continue over the short term with production adjusting to meet consumption by 2024–25 returning the world to a production surplus in the medium term.

s ABARES estimate. f ABARES forecast. z ABARES projection.
Source: ABARES; CZAPP; ISO; USDA

The pace of sugar production growth will depend on the speed of the global economic recovery and fall in energy prices. A faster recovery could see global production increase steadily to 193 million tonnes by 2026–27. However, should energy prices remain higher for longer, and global economic activity be subdued, global sugar production could stall and fall to 175 million tonnes in 2022–23, before recovering to 187 million tonnes by 2026–27 (Figure 1‑7).

Brazilian exports down in 2022–23

Hot and dry seasonal conditions are expected to reduce soil moisture at the beginning of the 2022 planting season reducing yields, production, and exports. Brazil is the largest producer and exporter of sugar in the world accounting for approximately 43% of global exports on average since 2015–16. A poor start to the Brazilian growing season will severely reduce global stocks of sugar and place upward pressure on prices in 2022–23.

WTO rule against Indian export subsidies

India is the second largest sugar producer in the world and has recently overtaken Thailand as the second largest exporter behind Brazil. Indian sugar exports are expected to reach 7 million tonnes in 2021–22, filling global supply gaps left by lower production in Brazil and Thailand. India’s sugar industry is highly supported by subsidies for raw sugar exports and domestic support measures for sugar cane producers, which were introduced in 2014. As a result, in the seven years following the introduction of these support policies, Indian sugar exports averaged 56% higher than the previous seven years (Figure 1‑8). In December 2021, the WTO ruled that, between 2016 and 2018, the value of the domestic support measures far exceeded the permitted 10% of the total value of sugarcane production allowed under the Agreement on Agriculture (AoA), and its export subsidies for sugar were inconsistent with WTO export subsidy prohibitions. Over that period, the WTO ruled that the expansion of exports supported by the subsidy arrangements suppressed international market prices. The Indian government appealed the ruling to the WTO Appellate Body. However, because there are currently no sitting members available to review the ruling, India is unlikely to implement the recommendations of the Panel report for the foreseeable future.

The Indian Minister of State for Food and Consumer Affairs has not yet announced export subsidies for the 2021–22 marketing year. However, domestic price support measures have remained in place and an estimated 4.6 million tonnes of raw sugar have been contracted for export as of February 2022 without export subsidies. According to the Indian Sugar Mills Association, millers are refraining from entering further export contracts at this time on expectations of higher prices in the future. In the medium-term, India is likely to maintain their position as a price insensitive supplier to the world suppressing global prices.

s USDA estimate.
Source: USDA

Global demand for sugar is relatively stable with consumption being driven by population growth and urbanisation in developing countries. As people relocate to urban environments from rural areas they increase their consumption of processed goods, takeaway foods and soft drinks all of which contain higher levels of sugar. Despite this, the pace of consumption growth has been trending steadily downwards since the early 2000’s as consumers become more health conscious opting for artificial sweeteners or sugar free products. Governments around the world have also increasingly implemented sugar consumption taxes further contributing to the decline.

Consumption is expected to fall in 2022–23 before returning to steady growth driven by population increases (Figure 1‑9). The fall in consumption could be intensified under a slower recovery scenario as consumers in key nations would have access to less discretionary income due to inflationary pressures.

s ABARES estimate. f ABARES forecast. z ABARES projection.
Source: ABARES; USDA

Will Petrobras reign in fuel prices?

Brazil’s decision of whether to focus production towards sugar or ethanol has a large impact on global sugar supply. Most vehicles in Brazil can run on ethanol or petrol mixed with ethanol, which allows consumers to purchase fuel depending on price competitiveness. As a result, higher oil prices drive higher petrol prices in Brazil, which makes ethanol more attractive to consumers. The increased demand for ethanol then increases prices which in turn makes ethanol production more attractive to millers when compared against raw sugar production.

There have been calls from some members of parliament for Petrobras (a state-run oil company) to introduce a price cap on fuel to rein in inflation. If this was to happen, it is likely that raw sugar production would become more competitive to Brazilian mills in 2023–24. This would result in increased exports driving down global prices further than currently forecast.

Indian appeal to World Trade Organisation

Between 2014 and 2021 the Indian government provided domestic support for sugar cane productions and subsidised sugar exports. This allowed cheap supply to enter global markets driving down international prices. In 2021 the WTO ruled that India's export-contingent payments to sugar mills were inconsistent with WTO export subsidy prohibitions and exceeded the permitted 10% of the total value of sugarcane production allowed under the Agreement on Agriculture (AoA). The Indian government appealed that ruling to the Appellate Body. However, because there are currently no sitting members available on the appellate body to review the ruling, India is unlikely to implement the recommendations of the panel report in the foreseeable future. If an Appellate Body is formed and the ruling is maintained over the outlook period, then India will be under pressure to implement the recommendations. This could reduce India's price insensitive supply to global markets limiting the smoothing effect that Indian sugar exports could have on international prices over the outlook period.