* Production costs exceed market price in many areas
* Stand-off between cane farmers, mills in India
* Global market seen balanced or in deficit in 2014/15
By David Brough
LONDON, Nov 4 A global merchant's plan to sell
its loss-making sugar milling operation is the first sign that
low prices could drive mills out of business and move the market
from a surplus to a deficit as soon as next season.
Merchant Bunge Ltd's new chief executive has
signalled plans to shed its Brazilian sugar milling business,
making it the first such player to consider exiting the once-hot
sector, which has swallowed billions of dollars of investment.
Mills in major producers Brazil, India and China have
struggled with tumbling margins and years of falling prices, and
a coming wave of closures appears to be a near-certainty.
In the centre-south growing region of Brazil, the world's
top sugar producer and exporter, as many as 50 of the 330 active
sugar mills may not restart in the next season, according to
Brazilian cane industry group Unica.
Benchmark sugar prices sank to three-year lows in July
, succumbing to the huge global surpluses of recent years.
Meanwhile, governments have supported the prices that mills
must pay to cane farmers. The combination of high local costs
and falling global prices have squeezed mills' margins.
Production costs for a pound of sugar in many areas now
exceed the world market price.
Stefan Uhlenbrock, an analyst with F.O. Licht, said there
was a real risk that mills in big producing countries such as
Brazil could go out of business.
"The surpluses in the world market and the financial
difficulties of mills mean that sooner or later producers will
turn off the tap," Uhlenbrock said. "This could trigger a severe
downturn in sugar production into 2014/15."
Sergey Gudoshnikov, a senior economist of the International
Sugar Organization (ISO), also predicted consolidation in the
milling sector, which would give survivors the benefits of
economies of scale and greater flexibility.
"It is without question that mills' margins are suffering,"
Gudoshnikov said. "I am more than sure that there will be more
A leading Indian miller noted huge pressure on margins of
sugar mills in India, the world's top sugar consumer.
"The situation is grim to say the least," said Abinash
Verma, director general of the Indian Sugar Mills Association.
"Prices have not only been depressed for a long time, they
have been consistently below production cost, and we have been
asking the government to step in to help us stabilise prices."
SURPLUSES, PRICE SUPPORTS
The ISO reported global surpluses of 6.1 million tonnes in
2011/12 and 10.2 million in 2012/13 and has estimated a surplus
of 4.5 million tonnes in 2013/14, weighing on prices.
The ISO has not yet released a forecast for 2014/15, but
Gudoshnikov said he expected the global market to be finely
balanced or to show a small surplus.
He added, "The global sugar market in 2014/15 may be
balanced or in slight deficit if production costs persist above
The financial problems of mills have led to delays in cane
crushing in major growing states in India.
"A freefall in sugar prices has become so critical that
banks have refused to lend working capital to mills, and that's
the main reason behind the delay in cane crushing," Verma said.
In China, mills are also suffering from government-supported
"Either the government needs to reduce the fixed price of
cane for farmers or alternatively the market support, which is
resulting in excessive imports," said Tom McNeill,
Australia-based director at commodities analyst Green Pool.
Current Chinese domestic prices are equivalent to $880-890 a
tonne, almost double the global price, because of government
support for cane and beet farmers, who receive $70 per tonne for
cane, compared with just $30 per tonne in Thailand.
The result is squeezed margins for Chinese mills.
"This year some of the smaller-scale mills are losing money,
but not everyone, and it hasn't reached a level where companies
are going bankrupt," said Zhan Xiao, a senior sugar analyst at
"But if the sugar price continues to drop next year, it
could be more serious."