On July 18th 2007 Bloomberg reported a three-month high in New York sugar prices on the back of speculation that rising oil prices will shift sugar cane over to ethanol production, with one of the largest Brazilian sugar producers reducing sugar production by 8.7% and increasing ethanol production by 11%. However by mid-August prices were approaching 9 cents per lb according to the World Association of Beet and Cane Growers.
Meanwhile F.O. Licht has revised upwards its estimates of global sugar production to 167.3 million tonnes in 2006/07 compared to 152.6 million tonnes in 2005/06. This estimate is 5.5 million tonnes higher than previously predicted. The expansion is largely attributable to the rise in Indian production, which is seen ‘to a great extent responsible for the softness in global sugar prices’. The report held that production will sooner or later react to the fall in world market prices which are below the costs of production.
While there is hope that a structural change in the world sugar market is occurring with production becoming much more responsive to price changes, the level of speculation in the market may well be contributing to a certain degree of volatility. It remains to be seen how quickly over the coming period production levels adjust to declining prices. This will be the test as to whether a structural change in the world sugar market has indeed occurred.