Asian F&Bs likely to get hurt by sugar production's bitter deficit

Estimated sugar production loss is around 2 million tonnes.

Months after the El Niño phenomenon has officially ceased, its impacts still badger agribusinesses, with sugar production expected to be drastically lower in the coming sugar season.

According to a report by Singapore's Rabobank, world raw sugar prices have already soared 30% since mid-April as the market started factoring in potentially lower global sugar output in 2016/17.

"Domestic sugar prices in Asia have also started to reflect tighter fundamentals. Higher price trend is likely to persist over the next few quarters and will have substantial impact on Asian F&B corporate margins," the report stated.

It explained that the El Niño-induced drought already triggered sugar production to fall to a five-year low.

With this, the report claimed that Asia will witness its first sugar deficit in over five years, with F&B firms' margins at risk.

In Asia, estimated sugar deficit is at 2 million tonnes while world sugar deficit is expected to soar to 5.5 million tonnes

At the current price level, industrial buyers are paying around 42% higher than 2015 prices.

"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," the report noted.

Some countries may face ballooning in costs and squeeze to profit margins. For Others, they might face a double whammy of high domestic and wholesale prices when they buy from local sugar refiners as in the case of Indonesia and China, where

However, while predictions for soft drink consumption growth in Asia have been lowered, Rabobank projects growth to remain ahead of most other regions.

"For F&B segments with significant exposure to sweeteners, overall Asia growth was ~8.5% versus the global growth of ~3% between 2006-2015. Despite recent slowdown in Chinese F&B market, a 40% of the global volume growth during 2015-18 will come from Asian F&B market," it explained.

Rabobank manifested that for companies exposed to higher sugar prices, a mixture of operational and financial approaches may be able to mitigate the risk and reduce pressure on margins.

"Companies’ risk mitigation plan 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," the report expounded.