Cargill joint venture positioned to beat sugar market blues

The sugar market has been a tough place for the past five years.

Prices have been on a downward trajectory, more than halving from a 31-year high in early 2011, as government subsidies in producing countries and the planting cycle of the sugar cane has resulted in abundant supplies.

All along the sugar supply chain, farmers, refiners and traders are feeling the pain. For the commodity traders, an oversupplied market has made it hard to shift the sweetener, with problems exacerbated by increased competition.

It was against this backdrop that the sugar trading operations of Cargill, one of the world's largest food suppliers, and Copersucar, a co-operative of Brazilian sugar and ethanol producers, decided to join forces in October.

The new company, Alvean, which brings together the world's biggest sugar producer and a leading global food distributor, will be one of the biggest players in the industry, shipping 10m tonnes of the sweetener, or 30 per cent of the global total.

"We started talking about doing something together two years ago," says Ivo Sarjanovic, formerly Cargill's head of sugar and now chief executive of Alvean.

"You have had a lot of stress in the supply chain. Producers, millers and farmers are suffering in most places," adds Soren Hoed Jensen, Copersucar's head of trading and now the joint venture's chief operating officer.

Mr Sarjanovic says both players felt there would be big changes in the industry in the next three to four years, and they wanted to be ahead of the curve.

"You have a sense that there needs to be transformation," he says.

Sugar is slowly playing catch up with other commodity sectors, where the name of the game is vertical integration, where companies try and expand along the supply chain.

Wilmar, the Singapore-based agricultural trader, has established itself as a leading sugar trader over the past few years, and has built an operation with interests in production, refining, trading and distribution. Meanwhile commodities trader ED&F Man sold a stake to German sugar producer Suedzucker in 2012.

Alvean is a slightly different animal as it focuses on trading and is not involved in sugar production. However, through its parent companies, it has access to Brazilian sugar supply, as well as the logistical assets, such as port facilities and transport, and the backing from their balance sheets.

The new company will have three income streams to draw on. The first two are the conventional businesses - shipping sugar from one place to another, a low-margin business, and buying and selling on the markets. The latter will benefit from increased information from the operations of the two companies.

Alvean will also offer a combination of services to customers, including logistics, risk management, financing and access to derivatives.

"The integrated model will probably be the only model that will be left as companies search for financial strength and synergies," says Pierre Sebag, a long time sugar trader and consultant.

The creation of Alvean returns Cargill's sugar trading business, once a dominant force, back to the top of the league. The company made its name with its active trading using futures and physical markets, and was behind some big moves in prices in the past. However, the sugar operations were reorganised after it posted losses in 2012, and since then it has kept a low profile.

For Brazil's Copersucar, whose members account for almost a third of the country's sugar cane production, the joint venture widens its trade with international counterparts.

Some industry rivals have jokingly characterised the new venture as "two people lost in the woods who meet and decide to join up". But as many rival traders struggle, the potential for further growth in market share is big, say some analysts.

"Some people are underestimating the JV," says one.

But along with the rest of the industry, Alvean faces the headwinds brought on by the weak sugar market. The sugar price is hovering around 16 cents a pound, "You may still be building a little bit of stock," says Mr Jensen, referring to the continuing build up of inventories.

The Brazilian sugar industry, with many indebted mills, continues to suffer from inflation and uncertainty about government energy policies, which could potentially support usage of ethanol made from sugar.

With the Brazilian weather looking drier than average, Mr Sarjanovic says 2015 could be a turning point, but predicts "nothing abrupt" will happen to the price.

Mr Jensen believes the sugar market can see the current bear market through: "It's tough times but there have been similarly tough times before. These are the cycles."

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