A higher sugar price trend is likely to persist over the next few quarters and will substantially impact Asian food and beverage (F&B) corporate margins, according to Rabobank's latest report 'Hurry Cane: Managing Higher Sugar Prices in Asia'.

The report said world raw sugar prices had risen 30 percent since mid-April, from US$14.3 c/lb to US$18.8 c/lb (basis July futures), as the market factored in potentially lower global sugar output in 2016/17.

Rabobank said domestic sugar prices in Asia had also started to reflect tighter fundamentals and the region was expected to experience the first sugar deficit in over five years.

Sugar production in Asia is anticipated to be significantly lower in the 2016/2017 sugar season, as the 2015 El Nino-induced drought pulled output down to a five-year low, the report said.

For 2015/2016, Rabobank forecast that Asia would witness its first sugar deficit of an estimated two million tonnes in over five years.

On a global level, while Europe and Brazil are forecast to see improved production next year, Rabobank expected a world sugar deficit of about 5.5 million tonnes in the next sugar season.

It also said soft drinks have been one of the most critical volume drivers for Asian sugar consumption.

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

Dairy — mainly condensed milk and ice cream — and confectionery, the other key segments, were expected to grow at a stable rate in the near future.

For F&B segments with significant exposure to sweeteners, overall Asia growth was about 8.5 percent versus the global growth of about 3.0 percent between 2006-2015.

Despite the recent slowdown in Chinese F&B market, 40 percent of the global volume growth during 2015-18 would come from the Asian F&B market.

Rabobank noted that for companies exposed to higher sugar prices, a mixture of operational and financial approaches was available to mitigate the risk and reduce pressure on business margins.

Low inventory and prediction for reduced crop was keeping sugar prices high, said Rabobank.

The twin impact of sustained demand and lower 2015-16 production has pulled Asian sugar inventory to historic lows.

Depending on local supply-demand gap, sugar prices in the region has increased by 30 percent-50 percent from levels seen in calendar year 2015.

With subdued 2016-17 production expectation and sustained growth in demand, Rabobank estimated that there was ample tailwind to support current levels until the fourth quarter of 2016.

At current prices of US$17.99 cents per pound, industrial buyers are paying about 42 percent higher than 2015 prices implying an additional US$3.5 billion on the regional cost of goods sold.

For individual countries, the full impact would depend on the response of the local refined sugar price to the supply/demand gap.

For sectors with a direct dependence on sugar (like soft drinks, rum, confectionery and condensed milk) as a raw material, the impact would be particularly severe, said Rabobank.

For example, in India, domestic prices have risen quickly over the past six months, and if downstream users are slow to react, it could mean a ballooning in costs and an squeeze on profit margins.

Meanwhile, for Indonesia and China, where sugar imports form a huge part of local consumption, F&B corporates would face a double whammy of high domestic and wholesale prices when they buy from local sugar factories and refiners.

Whereas, in Thailand, where domestic wholesale prices are capped by government regulations, they would feel no difference should global sugar future prices remain high.

Meanwhile, downstream buyers in Malaysia would need to put in place appropriate financial and operational strategies, while the Philippines, this year, is forecast, to have sufficient domestic sugar supply, and hence would be less vulnerable to sugar prices.

Rabobank said for companies exposed to higher sugar prices, a mixture of operational and financial approaches were available to mitigate the risk and reduce pressure on business margins.

Companies' risk mitigation plan should include a combination of commodity hedging and operational strategies, it added.

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, Rabobank said.