Asian food and beverage margins at risk due to rising sugar prices

By Richard Whitehead contact

- Last updated on GMT

© iStock
© iStock

Related tags: Milk, Soft drink, Rabobank

Asian sugar production is expected to see its first deficit in over five years after a drought last year prompted by El Niño-induced pulled output down to a five-year low, resulting in a period of high raw material prices. 

Asia’s 2015/2016 harvest is expected to be around 2m tonnes lower than last year’s total, to drive world production into a deficit of some 5.5m tonnes. This is despite anticipated increased production in Europe and Brazil.

World raw sugar prices have risen by 30% since mid-April, when the market began to factor in potentially lower global sugar output in 2016/17—a trend that is likely to persist over the next few quarters.

According to agribusiness specialist Rabobank, higher prices will have a substantial impact on corporate F&B margins in Asia, where soft drinks have been among the most critical volume drivers for sugar consumption. 

However, while predictions for soft drink consumption growth in this region have been lowered, Rabobank projects demand growth to remain ahead of most other regions. Dairy products, including condensed milk and ice cream, and confectionery are expected to grow at a stable rate in the near future. 

For F&B segments with significant exposure to sweeteners, overall Asian growth has been at around 8.5% in the last year, compared to global growth of roughly 3% between 2006 and 2015. 

Despite a recent slowdown in China’s F&B market, 40% of the global volume growth during 2015-18 will still come from Asia.

The twin impact of sustained demand and lower production has pulled the region’s sugar inventory at historic lows. Depending on the local supply-demand gap, sugar prices have increased by between 30% and 50% compared to levels seen in 2015.

Subdued upcoming production expectations and sustained growth in demand have led Rabobank to estimate that there will enough tailwind to support current levels at least until the fourth quarter of 2016.

At current price levels, industrial buyers are paying around 42% more than they did in 2015, adding an additional US$3.5bn to the regional cost of goods sold. For individual countries, the full impact will depend on the response of locally refined sugar prices to the gap between demand and supply. 

For sectors with a direct dependence on sugar as a raw material, such as soft drinks, rum, confectionery and condensed milk, the impact will be particularly severe. 

In India, for example, domestic prices have risen quickly over the last six months, and if downstream users are slow to react, this could mean a ballooning in costs and a squeeze to profit margins. 

Meanwhile, for Indonesia and China, where sugar imports form a huge chunk of local consumption, F&B businesses will face the double prospect of high domestic and wholesale prices when they buy from local sugar factories and refiners. 

In contrast, markets where domestic wholesale prices are capped by government regulations, such as Thailand, companies should not feel the squeeze while sugar future prices are high.  

Downstream buyers in Malaysia will need to put in place appropriate financial and operational strategies, Rabobank recommends, while the Philippines this year is forecast to have sufficient domestic sugar supply, and hence will be less vulnerable to outside influences.

It advises companies exposed to higher sugar prices to have a mixture of operational and financial approaches available to mitigate risk and reduce pressure on business margins. 

Their risk mitigation plans should include a combination of commodity hedging and operational strategies.

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