The cost of producing sugar in Brazil, the world’s largest exporter, is set to surge by 85 per cent over the next two decades, putting a floor on prices at a significantly higher level than in the past, according to new research by an influential merchant.

The sugar market – for a long time a niche for specialists such as trading houses such as Cargill and soft drinks companies such as Coca-Cola – has become a mainstream asset in the past few years as prices rallied to a three-decade high. Pension funds now invest in sugar futures via a basket of commodities such as the popular S&P GSCI index.

Czarnikow, the London-based sugar merchant that this week celebrated its 150th anniversary, said in a report that Brazil, which accounts for more than half of the world’s sugar exports, would see production costs of 35 cents per pound by 2030.

The forecast is well above current raw sugar prices, suggesting that the price of the sweetener could continue to rise over the next few years. In New York on Thursday, the benchmark raw sugar contract traded at 29.63 cents per pound, just below a 30-year high of 36.08 cents set earlier this year.

The merchant forecast that Brazil would need to invest at least $340bn – and potentially up to $490bn – in the next two decades to meet the rise in global demand for the sweetener, particularly in developing countries. Sugarcane demand is also surging due to the use of the crop for ethanol production.

“Given the exhaustion of low cost growth opportunities to increase supply and the pressure being placed upon agricultural markets by a growing population and aspirations for higher living standards, our belief is that Brazilian marginal cost will continue to provide a strong guide to the general upward trend in global sugar prices,” Czarnikow said in its report. “Over the past decades world prices have found support when they have fallen to Brazilian cost levels,” it added.

Toby Cohen, head of research at Czarnikow, said that the rise in cost would be primarily driven by wage inflation, but also growth in costs associated with the investment in mechanisation and infrastructure development. “These two issues will change the industry and the global sugar market,” he said.

The cost of sugar has become an important political factor as higher prices trigger protests in emerging countries such as India, the world’s biggest consumer. Algeria, a big consumer in north Africa which saw shortages earlier this year, suffered riots with protesters chanting “bring us sugar”, local media reported.

Czarnikow said that Brazil will need to crush up to 1.4bn tonnes of sugar cane by 2030, up from about 600m currently. The merchant says that to meet the increase in sugar and ethanol demand Brazil would need to more than double the farmland dedicated to sugarcane, expanding it by nearly 9.2m hectares.

source: FT

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