Drought has stricken harvests across the northern hemisphere, wreaking havoc on grain production from Iowa to the Black Sea, but amidst the burgeoning chaos over food supply availabilities, sugar may be taking on a new role in the economies of Central Europe, rising like a phoenix from the ashes of the drought.
It may seem like a bizarre connection, if not a flimsy one, but the region is nonetheless taking a different look at sugar. Up until now, when it came to sugar in countries like Russia and Belarus, the focus was on self-sufficiency in production. With that goal achieved and sugar supplies erratic in major producers like Brazil and India, these two partners are coming together in an unlikely marriage to dominate overland sugar trade in the region.
Russia made it clear that it wanted to achieve self-sufficiency in just a handful of years, and so it has. Last year it doubled its domestic beet sugar production to 5.1 million tonnes, leading to a drop in raw sugar imports by more than 80%. The country began exporting with gusto for the first time ever, and recent counts estimate exports have reached 300,000 metric tonnes for the season that just ended.
That very well could have been a fluke, much like in Ukraine who saw such over production that prices crumbled and farmers switched to other crops. Ukraine has continued to reduce its sugar production, with sowings down 15% this year, absorbing domestic surpluses while exporting to countries like Kazakhstan via Russia, but it may only be the end of this year that will finally see their 2010 over-production and 2011 unexpected bumper crop finally balance out.
But Russia’s big harvest this past season doesn’t appear to have been a fluke at all. The national sugar producers association is expecting 5 million tonnes of production for this coming crop, though effects from the drought that has reached many parts of the top half of the planet may pull that figure down to 4.8 million tonnes. But no matter. It appears Russia was serious about picking up its production and it’s not stopping now.
In fact, the country has several new beet sugar factories under development. A new US$273 million sugar factory was announced in April for the Voronezh region, which is now just awaiting final approval based on local water supply availability. NikOil plans to construct a sugar factory jointly with local authorities in the Kamensky province of Rostov-Don region to the tune of US$683 million. The national agriculture ministry also plans to build two beet factories in the Stavropol region to process 1 million tonnes of beets, bringing the region’s total processing capacity to 4 million tonnes.
The Russian customs union region of Russia, Belarus and Kazakhstan have a joint plan to boost their regional sugar production by 20% by 2020 to a total of 6.7 million tonnes. Russia is well on its way to achieving that goal, but Belarus has kicked into gear in recent months as well. The country, whose beet slicing is set to start Sept. 1, expects to produce 4.5 million tonnes of beet this year just as it did last year, though yields might be higher, leading to more than 600,000 tonnes of sugar production.
So with all of this sugar availability, Russia and Belarus have decided to take their show on the road, as it were. This week it was announced that the two countries are developing a joint venture to export sugar to third countries beyond the customs union via overland routes. Key markets will be Central Asia like Afghanistan and Iran, as well as the European Union.
The key will be in finding a way to get the sugar out of the customs union before supplies weigh on sugar prices and reverse all of the good will the countries have created among their sugarbeet farmers. In Russia, sugar prices started falling as early as July and by late August the decision to boost exports by 10% was approved. This JV with Belarus for joint marketing of sugar could be just the ticket to ensure good returns on sugar exports in significant enough volumes to make a difference. This season alone, Russia and Belarus are likely to offer 300,000 tonnes each of domestic beet sugar production.
Russia’s massive installed capacity for raw sugar refining introduces an interesting opportunity as the country looks to boost exports. Focus on white sugar tolling has thus far been on North African countries, but the rush to install capacity a few years back saw an interesting market turn into over-capacity fairly quickly. However, Russia’s existing capacity offers perhaps a better opportunity because there is no investment required, just the use of existing assets which are sitting idle thanks to switching away from imports.
With white sugar premiums remaining above US$100 well into 2013, despite raw sugar prices remaining fairly high, if supplies could be secured then Russia with its new export partner could be well placed to boost trade into those more difficult to reach former-Soviet states and other Central Asian markets.
Though raw sugar imports were down by more than 80% this past season, estimates are that Russia could import between half a million and a million tonnes of raws between March and May next year after its beet harvest has been processed. Raw sugar prices remain high enough that import duties for September remain at their lowest US$140 per tonne, so some profit taking opportunities in the market might open up spot buying purchases before the spring as well, taking this new focus on exports into consideration.
Whether or not they take advantage of sugar imports now or in the spring, watch closely as Russia and Belarus team up to take over the region’s sugar trade. It could get very interesting indeed.