Good Market Situation
According the European Commission, 0,9 Mio. Tons of Sugar have been imported and 2,4 Mio. Tons have been exported, in the first 8 month of the Marketing Year 2017/18. In May, the EU had Stocks of at 9.2 Mio. Tons compared to 5,3 Mio. Tons in May 2017 – higher than in 2016/17 and 2015/16. And here we compare imports of mostly Raw Sugar imports versus a pure export of white sugar! It is obvious, the new regulation has driven prices down, showing lowest FOB Prices of 327€/Ton reported in May. World prices are on 2008 level, historically very low.
Bad Market Position
These are all good signs for all Sugar using industries. But, apparently, imports of sugar are still managed the old way – by the traditional Sugar Producers. Hence, while the Sugar Producers have developed new sources, Food and Beverage Producers didn’t progress too much, and it looks like, that Sugar Producers outside the EU do not perform direct B2B business with Food Processors.
Commodity, in an “oligopolistic” market. How can a commodity be in an oligopoly?
Sugar became a real Soft Commodity in the EU, too. But it looks like, that in the EU, Sugar isn’t bought following the new market circumstances, yet. Supply still is managed by the few traditional European Sugar Producers. The Food and Beverage Producers as well as Producers of Sugar in the origins, apparently didn’t manage to establish direct B2B. Why? So, nothing changed too much in the Supply Chain. Supply Risk Management remains with the Sugar Producers, on which the buyers need to relay. Supply & Demand is managed by a hand full of Suppliers. Although there are hundreds of Sugar Producers outside the EU. Their output is above 175 Mio. Tons of Sugar.
It needs to be known, that 80% of the World Sugar Production is based on Cane. The CAP Reform did its Job, prices dropped, yes. The first objective of the Reform has been met, although. What is going to happen if crops turn negative? First signals for lower harvest are already expressed by European farmers, for the running campaign. Prices could have reached their low level, yet. Hence, the market starts turning bullish, from fundamental and technical perspective! What is going to happen if the Exchange Rate EUR/USD continues depreciating? What is the most significant reason for the current Sugar Price – Supply & Demand or Currency? And, for sure, there are more questions to be answered for a sustainable Sourcing Strategy and its Risk Mitigation plan.
In the EU we can observe a continuous decline of own production. More and more Sugar is imported – who manages this imports? Volatility of prices is rising. Which opportunities do we have, which options are viable? One thing seems too obvious, “EU” Sugar obtained a real Soft Commodity profile. While commodities are characterized by open markets, a lot of sources (tons and suppliers) and standard specification, it looks like that EU Sugar is not leveraged enough. The so called Softs are traded on Futures Markets, fixing future prices, in order farmers can better manage their crops and prices. Speculators try to make their profit by “betting” on rising or falling prices. All this only on paper. Seldom it turns into physical supply contracts. This cannot be the interest of industrial buyers, who are responsible to support competitiveness of their companies, to mitigate the financial risk and to ensure sufficient and smooth supply. Are these Buyers prepared to manage this new Sugar profile?
This “new” Sugar profile offers to leverage aggressively by auctioning or with bidding events. There are hundreds of Sugar Producers outside the EU. Are these Producers having access to the EU Sugar Buyers? Are they prepared for export? Do these Producers have transparency or enough Market Intelligence to deal with European Buyers? If they don’t have a chance to sell their Sugar, they’ll convert it into Ethanol. Which sourcing options do the EU Buyers have?
The only way to get answers to all these questions is to put hands on. Challenge Specifications and rethink the buying and contracting playbook. Design a sourcing strategy. Run RFIs, RFPs and explore the market opportunities!
by Paolo Causo
written for ANT-PROGRAM