Sugar Supply Shortage Looming as Cyclone Destroys Australian Crops

Sugar cane being harvested on a farm in Australia. Photographer: Eric Taylor/Bloomberg

Feb. 06 (Bloomberg) — World sugar supplies will probably fall short of demand, said Rabobank Groep NV, after a cyclone with winds stronger than Hurricane Katrina destroyed homes and smashed crops in Australia, driving prices to 30-year highs.

Tropical Cyclone Yasi ripped through northern Queensland, a region growing a third of the country’s cane, cutting output potential in the area by about 50 percent, producers group Canegrowers said Feb. 4. The storm, which the government says may have wiped out at least A$500 million ($507 million) of agricultural production, raised speculation that the world’s third-largest sugar exporter may struggle to match last year’s output that was the lowest in two decades.

“The whole house was shaking and vibrating,” said Gerry Borgna, 53, whose family has supplied cane to a mill at Tully, about 140 kilometers (87 miles) south of Cairns, since the 1920s.

“We could hear things flying past and we thought it was part of the house.” At the farm, power lines were lying across the road, a shed stood precariously and cane was pushed over. “To me, this is a disaster,” he said.

Raw sugar soared to 36.08 cents per pound on ICE Futures U.S. in New York on Feb. 2, the highest level since 1980, as the cyclone bore down on Queensland, closing at 32.64 cents on Feb. 4.

“On a global basis we thought we would have a slim stock build this year and it is likely that we are going to end up with another deficit,” Rabobank commodities analyst Wayne Gordon said by phone yesterday.

Floods, Rain

Australian sugar output may be 3.5 million metric tons from the June to December harvest this year, compared with 3.6 million tons from the previous crop, and down from expectations of 4.2 million to 4.3 million tons, according to Rabobank.

Flooding and heavy rain before the cyclone reduced estimates by about 500,000 tons and Yasi probably cut the outlook by a further 300,000 tons, Gordon said.

Output may be 3.8 million tons next season, Australia & New Zealand Banking Group Ltd. said on Feb. 3, while Commonwealth Bank of Australia commodity strategist Luke Mathews said the same day that the crop may be 3.6 million tons.

“It may well be that the production we saw last year might be repeated,” said John King, chief executive officer of Tully Sugar Ltd., referring to national raw sugar output. “You would like to think we can better that still, but a lot depends on the growing conditions in the next months.” The closely held company is the target of a takeover bid from Bunge Ltd.

Banana Crops

The destruction in Queensland from Yasi added to rain and flooding that left 35 people dead and disrupted coal mining. The nation, facing a bill that economists say may reach $20 billion after two months of floods, will need to make budget cuts after the cyclone exacerbated damage, Prime Minister Julia Gillard said yesterday on Channel Ten’s Meet the Press program.

Yasi also slammed into a banana-growing region representing about 85 percent of Australian production. Woolworths Ltd. raised its prices for the fruit on Feb. 4 and warned the damage would severely affect availability and prices in coming months.

“The region impacted by the cyclone contributes around A$1 billion of agricultural production annually, and initial reports suggest at least half of that has been wiped out this year, including around 80 percent of the state’s banana crop,” Treasurer Wayne Swan said yesterday.

While Canegrowers estimates the cyclone could have cut output potential in the affected area by half, 70 percent of Australia’s cane is grown outside the region hit by Yasi. The national crush last year was about 27 million tons compared with a usual level of more than 32 million tons, said Brisbane-based Canegrowers in December. The area north of Townsville typically crushes 10 million tons, the group said.

Lingering Damage

Tully may process about 1.4 million to 1.5 million tons of cane this year, compared with 1.8 million tons last season when the harvest was halted because of the weather, and down from a pre-cyclone estimate for 2011 of 1.8 million to 2 million tons, King said. Output would likely be curbed again in 2012 because of the lingering effect on crops, he said.

“Even putting Cyclone Yasi to one side, it was going to take a couple of years to rebound from the 2010 season,” said King, who left his shelter in the laundry of his Tully home during the eye of the storm to see if the mill’s smoke stacks were still standing before “ferocious” winds returned.

The stacks survived the night, while two cooling towers were on the ground, some sheeting was gone from the roof, a garage was blown away and 35 houses owned by the company had some form of damage, he said. The Red Cross is using a mill meeting-hall to provide emergency assistance to residents, many living in partly wrecked homes with no electricity.

Crushing Season

“We have got off quite lightly from the mill point of view,” King said. The company has until the crushing season starts in June to complete repairs.

Maryborough Sugar Factory Ltd. said in a statement last week it expected a 5 percent to 10 percent reduction in its total company estimate of 4 million tons of cane for the 2011 season. It has mills north of Tully in a joint venture with Bundaberg Sugar Co., a unit of Brussels-based Finasucre.

Sugar production globally may exceed demand by a “small” amount in 2011-2012, though the “fragile” balance will be vulnerable to weather, C. Czarnikow Sugar Futures Ltd. said Jan. 31. The market will remain in deficit in 2010-2011, it said.

In Australia, cane harvested this year will include so- called standover material left from 2010 because of rain, cane planted last year and re-growth crops harvested over several seasons. Borgna, who estimated the cyclone may have cut his potential output by more than 20 percent, said he was reluctant to lock in prices for more of his cane by forward-selling.

Standover cane was “a mess,” some of the crop may reach half the height it should and root systems were damaged, he said.

“For this year I am about 40 percent priced,” he said, and he was unwilling to price more because he didn’t know what crop he was going to get.

By Wendy Pugh – Feb 6, 2011 2:28 PM GMT+0100

Source: Bloomberg

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