Hurry Cane: Managing Higher Sugar Prices in Asia

Sugar production in Asia is expected to be significantly lower in the 2016/17 sugar season. Industrial demand for sugar, however, remains strong and is expected to increase as increasing prosperity in Asia continues to drive growth in packaged food and beverage consumption. While most countries have created policy frameworks to influence and stabilise domestic supply and sugar prices, industrial users remain open to the risk of higher prices and/or supply disruptions. Industrial buyers, therefore, will need to consider financial and operational strategies to mitigate these price risks.

picture of sugarcane

Production down

The rising demand from Food & Beverage (F&B) growth, coupled with consecutive poor sugar-producing years, has pushed Asia’s sugar inventory to historic lows. After a poor 2015/16, El Niño has impacted 2016/17 sugar output, making the region dependent on imported sugar in order to serve rising domestic industrial sugar demand.

While demand grows

Soft drinks have been one of the most critical volume drivers for Asian sugar consumption. While predictions for soft drink consumption growth have been lowered in Asia, projected growth remains ahead of most other regions. Dairy—mainly condensed milk—and biscuit & bakery are other key Food & Beverage segments of interest to the sugar industry. Both segments are expected to grow at a stable rate in the near future. 

Increase in price

While the overall F&B sector margin will be impacted by the higher sugar price, for sectors with a direct dependence on sugar—soft drinks, rum, confectionery and condensed milk—as a raw material, the impact will be particularly severe.

How to reduce the pressure on margins?

For companies exposed to higher sugar prices, a mixture of operational and financial approaches are available to mitigate the risk and reduce pressure on business margins. Protecting margin and driving volume growth will require a fine balancing act—between adopting strategies which can impact volume sales and maintaining gross margin. For most industrial sugar buyers, optimising procurement practices and commodity hedging offers a short-term risk-mitigating option. For large buyers, long-term strategies may even contemplate vertical integration.

Where to go from here