According to Rabobank, a higher price trend is likely to persist over the next few quarters. This will have substantial impact on Asian F&B corporate margins.
For 2015/2016, Asia is expected to witness its first sugar deficit year in over five years with an estimated deficit of around two million tonnes. Sugar production in Asia is expected to be significantly lower in the 2016/2017 sugar season, as the 2015 El Niño-induced drought pulled output down to a five-year low.
Globally, while Europe and Brazil forecast improved production next year, the world sugar deficit is estimated to be at 5.5 million tonnes in the next sugar season.
Soft drinks have been a critical volume driver for Asian sugar consumption. While predictions for soft drink consumption growth in Asia have been lowered, growth is still projected to remain ahead of most other regions.
Dairy — mainly condensed milk and ice cream — and confectionery are other key segments, and expected to grow at a stable rate in the near future. For F&B segments with significant exposure to sweeteners, overall growth in Asia was at 8.5 percent, compared to global growth of three percent for 2006-2015. Despite recent slowdown in the Chinese F&B market, 40 percent of the global volume growth during 2015-2018 will come from the Asian F&B market.
The twin impact of sustained demand and lowered 2015/16 production has pulled Asian sugar inventory at historic lows. Depending on the local supply-demand gap, sugar prices in the region have increased by 30 to 50 percent from levels seen in 2015.
With subdued 2016/17 production expectations and sustained growth in demand, Rabobank estimates enough tailwinds to support current levels until the fourth quarter of 2016.
Industrial buyers are currently paying 42 percent higher than 2015 prices, implying an additional US$3.5 billion on the regional cost of goods sold.
For individual countries, the full impact will depend on the response of the local refined sugar price to the supply and demand gap. For sectors with a direct dependence on sugar (like soft drinks, rum, confectionery and condensed milk) as a raw material, the impact will be particularly severe. For example, India has seen domestic prices have risen quickly over the past six months. If downstream users are slow to react, this could mean ballooning costs and a squeeze to profit margins.
Meanwhile, for Indonesia and China, where sugar imports form a huge part of local consumption, F&B corporates will face a double whammy of high domestic and wholesale prices when they buy from local sugar factories and refiners.
In markets like Thailand however, where domestic wholesale prices are capped by government regulations, they will feel no difference should global sugar future prices are high. Meanwhile, downstream buyers in Malaysia will need to put in place appropriate financial and operational strategies, while the Philippines this year is forecasted to have sufficient domestic sugar supply, and hence will be less vulnerable to sugar prices.
For companies exposed to higher sugar prices, a mixture of operational and financial could mitigate risk and reduce pressure on business margins. Risk mitigation plans should include a combination of commodity hedging and operational strategies. In specific situations, for large sugar users, vertical integration could become part of the long-term strategic sourcing plan, should valuations for mills come down to attractive levels.