Global Sugar

SUGAR – A CRITICAL AND COMPLEX GLOBAL MARKET

Sugar is a global commodity, with almost 180 million metric tons being produced in more than 120 countries each year. Though much of the sugar produced by these countries is consumed locally in food products or, increasingly, for ethanol production, the largest producing countries are often exporters as well and in total contribute 60-70 million metric tons delivered into the global market each year.

Raw sugar, also known as centrifugal sugar, is the primary traded form and is produced from either sugar cane or sugar beet. In any given year, 70-80% of sugar is produced from sugar cane grown in tropical countries, with the remaining 20-30% is produced from sugar beet, a root crop grown mostly in northern temperate zones.

Processed sugar comes in a wide variety of forms. The most common, and the most refined form, is granulated sugar, also called table sugar. Granulated sugar with larger crystals is called coarse sugar; with smaller crystals, it is called superfine sugar. Pearl sugar is composed of conglomerates of sugar particles. Brown sugars in various color ranges are defined by the amount of molasses present within them and can

range from bright yellow to dark brown. Specialty sugar types include powdered sugar (contains cornstarch), demerara-style sugar (light brown sugar with large crystals coated with molasses), muscovado sugar (stickier, coarse brown sugar produced at an early stage of refining), and turbinado-style sugar (partially purified, semi-refined crystal brown sugar). True raw sugar refers to partially purified sugar that is soft and brown and contains molasses and some impurities.

The primary market for sugar has traditionally been the food industry, with sugar used as a sweetener and to add texture and decoration to food products, including baked goods, cereals and beverages. However, within the last few decades, and with increasing focus on ESG, sugar has become an important feedstock in the

production of ethanol, particularly in the largest sugar producing countries.

The wholesale supply chain of sugar, from growing to consumption, is a geographically diverse (spanning 120 countries) and is comprised of a complex matrix of growers, millers, refiners, traders, distilleries, processors, marketers and industrial consumers.

Brazil, the world’s largest producer of sugar, produced over 38 million tons of sugar in 2023, which accounts for around 21% of the total global production. The country also was the largest exporter of sugar in 2013, shipping more than 28 million tons, or about 43% of the worldwide sugar export. In recent years, a large portion of the sugar produced in Brazil is used to produce ethanol, a crucial component of both the country’s push to lower greenhouse gas emission and of the Brazilian export economy. Though Brazil also produces ethanol from corn, the volume of sugar available for export in any given year can be heavily influenced by the balance between global fuel prices and global sugar prices. Additionally, given the concentration of sugar cane plantations in the middle of the country, local adverse weather conditions which reduce crop yields can significantly impact global sugar prices.

Source USDA Sugar:

Source USDA Sugar: World Markets and Trade Bulletin, May 2023

India is the second largest sugar producer and though the largest consumer of sugar, has historically ranked the second or third largest exporter alongside Thailand. In 2023, India accounted for 6,500 million tons in exported volume. However, like Brazil, India is increasingly looking to expand the country’s use of ethanol as a motor fuel and with recently passed legislation, India’s ethanol blending has reached 11.5%, with the government target is

by 2025. Additionally, the country is

on exports of ethanol feedstocks (including sugar) to help decrease ethanol costs and encourage its wider adoptions of as a motor fuel to meet that higher target. As such, it is likely the country’s role as a net exporter will diminish in the very near future.

Though global export supplies have risen over the last 5 years, increasing from 58 million metric tons in 2019 to 66 million in 2023 (with a forecasted 72 million tons in 2024), the deepening linkage between sugar and

SUGAR PRODUCTION

motor fuels (via ethanol) may result in lower available exports in the coming years. With environmental concerns continuing to capture headlines and geopolitical events driving volatility and higher prices for oil and oil products, it is likely that many of the largest exporters will follow Brazil’s and India’s lead and will increasingly look to domestically grown sugar as an attractive feedstock for fuel production, and as a method of meeting greenhouse gas emission reduction goals.

Sugar plantations are often part of vertically integrated operations in which the growing and milling operations are controlled and managed by individual firms which can range in size from small cooperatives to large multinational corporations. Sugar mills are located central to growing regions to reduce transportation costs and time from field to factory to ensure the highest yields from the cane or beet.

Though small independent sugar farms do continue to exist, vertical integration though the late 20th century and continuing up today has led to more consolidation and concentration of growing acreage, mills and refineries into larger operations. And, with improvements in agricultural management practices, such as more mechanization, soil management, and more efficient use of fertilizers, crop yields have continuously improved and have led to significant reductions in the environmental impacts of growing and processing of sugar, including reducing fertilizer runoff and lowering of atmospheric emissions.

Sugar crops, either cane or beet, are warm weather

crops and are harvested in the late fall. During the harvest, called the crush season, mills will operate around the clock for up to 4-5 months to process the crop and produce raw sugar. Though the sugar extraction process will be somewhat different for cane vs. sugar, and the merchantability of the final mill product will be different (raw sugar vs. white sugar), both require additional refining and/or processing to produce a variety of consumer products. Sugar mills may also be co-owned and co-located with ethanol refineries (more common in the larger exporting countries like Brazil), allowing switching of outputs (raw sugar vs. ethanol) depending on market conditions.

Sugar refineries may also be co-located with mills and can produce finished sugar products year-round, consuming inventories of stockpiled raw sugar; though more commonly, refineries are located closer to consumers, often near port facilities or rail terminals to more efficiently receive bulk volumes of traded raw sugar, either imported or domestically produced. Refineries, like mills and farms, may be independently owned and operated, but are increasingly part of a fully integrated sugar business, either corporate or cooperative owned.

Milling Sugar Cane

Sugar cane, a giant grass, is grown primarily in tropical and semitropical regions. Requiring abundant rainfall and sunlight to grow, the majority of the sugar cane production is not irrigated, relying solely on rainfall. Harvesting the sugar cane is performed either manually or mechanically, and in both cases the cane is cut close to the ground and the leaves removed. The plant re-grows each year from the original root, though experience has shown the crop yields are optimized by replanting in a 4 to 6 year cycle.

Once harvested, the sugar cane is transported as quickly as possible to the sugar mill to maximize the extraction of the sugar. Given the impacts of delayed processing, and the cost of transport, sugar mills are typically located central to the sugar cane growing areas they serve.

Once at the mill, the cane is washed to remove large dirt particles prior to entering the factory. Sugar cane

is processed in two stages. The first is the extraction of the cane juice via the crushing of the canes in a hammer or roller mill. The sugary juice is separated from the fiber, called bagasse, which is typically used in boilers onsite to produce steam and electricity for the facility. After extraction, the juice is quite dirty and requires rough filtration, cleaning and processing.

Though methods of concentrating and clarifying the cane juice can vary depending local traditions or preferences, most modern mills utilize sulfitation in the concentration process, in which the juice is passed into the top of distillation tower where sulfur dioxide vapor is introduced at the bottom and rises through the tower. Carbonation, which utilizes calcium carbonate or calcium sulfite, is often utilized to help impurities to settle from the juice. Once concentrated, the juice is further heated and is then mixed with a slurry of calcium hydroxide, also called milk of lime. Carbon dioxide may also be used to lower the alkalinity of the juice and help precipitate the carbonation sludge, which is then filtered from the juice. This process, called clarification, requires several hours and helps yield a whiter sugar product. Once complete, the sludge is removed from the bottom of the tank and the juice is removed from the top. The sludge is further processed by secondary filtration to extract any remaining sugars. After filtration, the remaining material, called mud, is returned to the fields as a fertilizer.

Once clarified, the juice is concentrated by boiling in a series of vacuum evaporators until it reaches a concentration of 50%–65% sugar. During evaporation, sediments are skimmed off the top of the evaporators

and the remaining product is a thick, nearly colorless sugar syrup.

The syrup is introduced onto a large vacuum pan to evaporate the syrup until it is saturated with sugar crystals, which form around a solution of pure sucrose suspended in alcohol and glycerin in a process known as seeding. As the mixture is boiled in a vacuum pan, water evaporates and sugar crystals continue to grow, forming massecuite, a thick mix of syrup and sugar crystals. The massecuite then enters a large crystallizer tank, where the material is slowly stirred and cooled, maximizing the crystallization process.

After crystallization, the massecuite is sent to centrifuges where the remaining liquid is separated from the crystalized sugar. The residue liquid, now termed molasses, is stored in tanks. The crystals are washed within the centrifuges, then removed, dried, screened for size and stored in bins for packaging for either wholesale or retail sales as raw sugar.

Processing of raw sugar usually occurs at a single facility, though often that plant may have refining capabilities that produce a sugar product (aka refined sugar) which is a purer and whiter form produced by removing any remaining impurities and color from the raw sugar. Once refined, this sugar can then be used to produce additional higher grade products such as powered sugars.

Commonly, exported sugar is raw and is shipped in bulk ocean-going vessels from the mill directly to refineries. There, the sugar is refined and can be tailored to meet

individual customers’ requirements. A full portfolio of sugars is produced in crystal, liquid and syrup form, and can include refined sugar, fine granulated sugar, white crystal sugar, crystal muscovado, demerara, caster icing, premium liquid sugar, or fine liquid sugar invert.

Milling Sugar Beet

Sugar beets are widely grown in the more temperate areas of the Northern Hemisphere. Though beet sugar is less costly to process (requiring only a single stage), sugar beets yield a lower quantity of sugar per acre than cane, requiring almost 4 times as much acreage to produce an equivalent cane sugar yield.

Sugar beets are harvested in the autumn and early winter and transported to the factory by large trucks. Given they are a root crop, beets are dirtier than cane and require more thorough precleaning and washing to help eliminate soil, stones, leaves and other debris and waste.

Once cleaned, processing begins by slicing the beet into thin chips or fine strips, called cossettes, to increase the surface area of the beet for enhanced sugar extraction. The cossettes are held in a tank and are kept in contact with hot water for around an hour. After soaking, cossettes are pumped into the bottom of tall tanks in which a rotating spiral shaft in the center transports the material upwards against the downward flow of water, enhancing sugar extraction. Afterward, the processed cossettes are pressed in screw presses to extract as much of the juice as possible. The residue from the cossettes can then be pelletized and used to

supplement animal feeds.

The raw juice produced at this point will usually contain about 14% sugar, and it must be cleaned before it can be used for sugar production. At this point, processing is very similar to that of cane sugar juice, usually including carbonatation, sulfitation, and evaporation in multi-stage evaporators and then evaporation pans.

And like cane sugar, the resulting massecuite is spun in centrifuges to separate the liquid from the solids. However, unlike cane sugar, the resulting dried sugar from beet processing is white and ready and can be more readily processed into consumer products. The liquid byproduct of centrifugal processing is called beet molasses, which can be sold for animal feed or to fermentation plants for production of alcohol.

THE SUGAR PROCESS

COMPLEXITY IN PRICE FORMATION

Sugar prices are, like any commodity, highly influenced by supply and demand. Abundant supplies driven by favorable weather and lower energy prices (reducing demand for ethanol) will naturally lead to lower prices. However, protectionist import quotas and tariffs, particularly by of the largest importing nations, can magnify price volatility by limiting the value and/or volume of sugar imports, further driving down prices.

For example, in 2017, the market was enjoying a period of higher prices, nearing as $400/ton, driven in large part by reduced crop yields due to drought conditions across the Asia Pacific growing regions. However, a combination of increased rainfall in the region (which increased sugarcane output), lower oil prices (which decreased ethanol demand and production) and higher import tariffs in China (which effectively decreased demand in one the world’s largest sugar importers) all conspired to drive down raw sugar prices by more than 40% during the year.

Additionally, high sugar prices can lead to switching

TRADING

Source: https://tradingeconomics.com/commodity/sugar

from sugar to other sweeteners, like isoglucose, derived from corn or wheat, reducing demand, increasing raw sugar inventories and adding to price volatility.

With more than 60 million metric tons of sugar exported for global markets, and with even more traded within country boundaries, sugar trade accounts for tens of billions of dollars in annual value. Though a number of exchanges help facilitate and improve price efficiencies of sugar trade around the globe, government imposed import tariffs and subsidization of local sugar (all intended to protect local growers) create price distortions that often make physical sugar prices difficult to predict and manage.

Though global bulk trade in sugar is largely for raw (or centrifugal) sugar, there are also active markets in refined

sugar and derivative products (such as fine granulated sugars, caster sugar, Demerara, and liquid sugars)

which are generally produced by refineries located within local or regional markets. Additionally, specific grades of sugars within each of those different derivative products may be traded, including such products as Coca Cola spec sugar. Each of these products requires different levels of refining or processing to achieve their specific product characteristics such as polarization (as measured by the ICUMSA scale) and grain size. As such, each will have a different price premium that can and will vary over time based on local market conditions and available refining capabilities.

For traders, merchants or industrial consumers, managing the complex pricing of these sugar products is an ongoing challenge. Perhaps not surprisingly given the nature of these agreements, much of the industry continues to rely on spreadsheets for capturing and valuing the product specifications for each contracted lot and the premiums and discounts that might be required based on the measured specifications of the final delivered product.

Most traders, merchants and industrial consumers will seek to manage their exposure to volatile raw sugar prices (which will impact finished sugar prices) via hedging on one or more of the various exchanges that offer sugar futures contracts. Exchanges offering

sugar futures include the Intercontinental Exchange (ICE), Brazilian Mercantile and Futures Exchange (BF&M), Kansai Commodities Exchange (KEX), Multi Commodity Exchange (MCX), National Commodity Exchange Limited (NCEL), National Commodities and Derivatives Exchange (NCDEX) and Zhengzou Commodity (CZCE) Exchange. Sugar options are also offered on several of these exchanges.

Though the many of the smaller exchanges do offer some advantages for trades within specific markets (as they are by their nature reflective of growing/ production conditions in that region), the two main futures contracts that are most commonly used and essentially influence the others are ICE New York No. 11 raw sugar contract and the London No. 5 for refined sugar trading.

Though these contracts and those offered by the regional exchanges provide some degree of forward price protection, the complexities of pricing finished sugar products (with a large number of variable quality parameters impacting settled prices) create additional price risk that is generally not covered well by standardized exchange contracts. This often results in less than optimal hedging and difficulties in measuring and managing risk.

ADDRESSING SUGAR MARKET COMPLEXITY IN CTRM APPLICATIONS

Traders, marketers and merchants often engage in wholesale buying, selling and movement of sugar around the globe. Given the size and scale of their transactions, these firms are generally the most exposed to price volatility, supply chain interruptions, and rapidly changing tariffs and import quotas.

As such, these wholesale market participants will rely on a structured commodity trading and risk management system to capture their commercial activities and measure/manage their risks. Unfortunately, given the complexities of sugar trading and the underlying contracts that facilitate the trades and physical movements, many of these companies are still forced to utilize a combination of spreadsheets and a vendor supplied CTRM system to accurately capture, value and account for their trading activities. This is particularly the case with users of older CTRM platforms that were never designed to address the unique needs of complex soft commodities like sugar. Additionally, these older solutions, usually installed on-premises or hosted in the cloud, require near constant updating to address code changes or updates in underlying technologies, driving up costs and potentially interfering with commercial operations.

Functionally, these older systems have difficulties managing many of the fundamental needs of sugar traders. Given that most of these existing solutions originated in other commodity markets that traded only standardized products (such as energies), they are generally lacking in addressing the specific commercial

needs of sugar industry participants. For example, as previously noted, there are multiple sugar exchanges trading different futures and derivative products with varying specifications. Capturing derivative trades and managing hedging positions against physical trades requires the ability to configure book structure to capture regional market commitments, and the ability to offer a consolidated view of all positions, including exchange trades, product in transit, and inventories.

Additionally, raw sugar and white sugar are both traded commodities. However, raw sugar is convertible into white and as such, white sugar carries a premium to raw that reflects the costs of refining/processing and logistics. This premium, known as the white premium, can change rapidly and must be tracked to properly value inventories and contract values for both commodities.

Sugar is traded based on a number of different specifications that affect the contract value of the product being bought or sold. These include specific product types (such as ICUMSA classes), different packaging or shipping methods (bulk or container) and qualities such as polarization. Each of these contractual

terms and shipping arrangements must be captured, valued and accounted for in the CTRM system. Systems

not designed to capture these qualities aspects will not be fit for the purpose for sugar trading.

EKA’S SOLUTION FOR THE SUGAR MARKET

Eka’s TRM (Trading and Risk Management) solution was founded in the agricultural softs markets. The platform’s DNA in complex markets ensures that sugar market participants, from origination through refining and distribution have the depth of functionality to rapidly capture physical and derivative trades, value positions, mark to market, manage risks and settle even the most complex agreement within the system. Using a fit for purpose sugar solution, like Eka’s TRM, can eliminate error and risk prone spreadsheets that are commonly required with other systems that have been adapted to try to address this complex market.

With more than 65 pre-built connectors for integration to both internal and external systems and exchanges, configuration and implementation times are reduced to a matter of weeks, not months or years. With Eka’s extendable platform, with more than 50 available applications, sugar market participants can easily configure a solution that fits their unique operations, markets and trading strategies.

Designed for usability, Eka’s intuitive UI for contract creation and amendment, derivative management,

settlement, washouts and customized reporting offers a simplified and tailored experience accessed across devices – mobile, tablets, and desktop. It also provides enterprise-level security with built-in capability for data encryption and data backup.

Eka’s TRM solution is built on a proprietary low-code and no-code based modern SaaS platform offering scalability, next-gen integration, and enterprise-level security specifically tailored for the sugar industry.

ABOUT EKA

Eka Software Solutions is a leading provider of cloud-based commodity trading and risk management solutions, for global businesses. Eka’s platform-driven approach helps customers overcome complex challenges and stay ahead of the curve in an environment of constant change. Eka’s solutions are modular, customizable, and designed to deliver continuous support while maintaining enterprise-level security.

One of Eka’s core offerings is their Commodity Trading and Risk Management (CTRM) solution, which enables businesses to make faster decisions through quick access to a single data model and customizable analytics. The system is highly scal able and can handle large amounts of data, making it well-suited for businesses with complex trading and risk management needs.

Eka’s CTRM solution includes over 50 applications, covering areas such as Position M2M, Value at Risk (VaR), Settlement, Derivatives Management,

Hedge Accounting, Supply Chain Management, and Procurement Analysis. Each application is designed to help businesses solve specific challenges and achieve their goals, whether that’s reducing risk, improving efficiency, or increasing profitability.

Eka was recently recognized by Risk Market as the best commodities trading system and best vendor for support and implementation. They were also named the category leader in Risk Quadrant and CTRM Solutions by Chartis. These accolades are a testament to Eka’s commitment to providing topnotch solutions and support to its customers.

ABOUT

Commodity Technology Advisory LLC

Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets.

Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group.

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ComTech Advisory also hosts the CTRMCenter, your online portal with news and views about commodity markets and technology as well as a comprehensive online directory of software and services providers. Please visit the CTRMCenter at: www.ctrmcenter.com

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