Is it all sweet with sugar prices in 2010?

A sugar crisis is developing in global markets. This deepened on Thursday after Indonesia, one of the world’s leading importers, failed to buy a single pound of the sweetener in its latest tender. The setback sent the price of white sugar in London to a record high of $760 a tonne. Sugar prices have surged 150 per cent since January 2009.

While sugar is no longer a key food commodity in developed countries, it remains a crucial source of calories in emerging countries, making its price a political issue. Shortages are already emerging in some Asian countries, according to local reports. Among the main importers, only Egypt appears to have covered its needs. “If they (Indonesia) don’t buy soon, the next stop is an empty shelf,” said Peter de Klerk at London-based sugar merchant Czarnikow.

This shortage has prompted the European Union to consider how to legally export more sugar under World Trade Organisation rules. “We are in an exceptional situation in the world market,” said an official in Brussels. Europe’s sugar exports are capped at about 1.37m tonnes after an agreement in 2004 when Brazil, Australia and Thailand – all big exporters – filed a legal complaint. European beet farmers have sufficient surpluses to export an additional 600,000-800,000 tonnes this year.

According to the Financial Times, the sugar crisis has been caused by a large supply deficit due to disappointing crops in Brazil and India, the world’s top producers, due to bad weather. Meanwhile, sugar demand has continued to grow. In India, the world’s largest consumer, a dry monsoon due to the El Niño weather phenomenon has damaged the cane crop. Sugar production has dropped to around 15m tonnes in 2009-10, down more than 40 per cent from a normal year. Meanwhile, El Niño brought rains to the dry season in Brazil, which accounts for 60 per cent of world exports. The wet weather has cut the number of days that farmers can cut cane and also reduced the amount of sucrose that refiners can extract, resulting in lower production.

Other producers, including Mexico, China, Russia and several central American countries have also harvested a lower than expected crop. There is a sugar Exchange Traded Note (SGG) to capitalise on this trend.