“It is a truth universally acknowledged”1 amongst those who work in the commodities sector that the key player in the vagaries of commodity prices is the totally unpredictable, weather, impacting output, and with it, the prices that follow the supply-demand balance. The global sugar market has shifted into deficit after five years of surpluses when prices were driven down. The recent spike in price has made sugar one of the best-performing agricultural commodities. Raw sugar futures went from 10 cents in August, 2015 to nearly 23 cents currently, a jump of 121% to the highest levels in four years.
Commodity price returns over July 2015 – June 2016
There is general consensus amongst industry analysts that next year will also continue with deficit production. The International Sugar Organization put the 2014/15 global deficit to 5.7 mln tonnes and the 2015/167 deficit at 7.0 mln tonnes. On the flip side, an estimated 25 million tonnes of sugar stock accumulated over the previous years will invariably dwindle to the lowest level since 2010/11.
In response to the high prices, Brazilian cane mills have hedged a record volume of sugar for the new crop at the ICE futures exchange in New York for delivery in March or April next year. The Brazilian mills sold forward 7.17 million tonnes of 2017/18 sugar in New York by the end of September, or 27% percent of estimated exports, according to Archer Consulting. The previous record for that type of operation was 19.7% of estimated exports in the 2014/15 crop.
Further, sugar companies across the globe have been basking in profits and increased share values. The largest sugar company in the world Südzucker, recently reported H1 2016/17 profits rose by 81% – rising sugar prices significantly contributed to the net profit of €155 million. Since the start of the 2015/16 season, from October last year to 30 September this year, shares in top Brazilian sugar companies have risen sharply – Cosan’s shares have jumped 93%, while Biosev’s and San Martinho’s stock prices have risen by 71% and 52%, respectively. In India, the share value of Upper Ganges Sugar & Industries Ltd, increased 601.90% so far in 2016, while Ugar Sugar Works Ltd and Oudh Sugar Mills Ltd, share values jumped 361.51% and 287.12%, respectively.
Speculative funds have piled into sugar. Although a net-long position held by non-commercial investors is normally seen as an indication of general bullishness of the market with investors placing bets on higher prices in the future, as the Financial Times points out2, due to the nature of the speculative bets, there is a genuine fear that a political (US presidential elections) or financial (bad news from the banking sector) event, “which may or may not be related to the sugar market could lead to a sharp sell-off as investors attempt to secure profits, square positions or to cover losses in other investments.”
As major sugar producers are set on expanding sugar production to records levels in 2017/18, it is inevitable that prices will fall back, “confirming the old adage that the sugar market is generally a bear market with the odd bull spike.”3 Unless climate change begins to play havoc with production on a regular basis, “market awaits the next weather issue as it seems little else seriously impacts on production.”3
1 From the opening line of Jane Austen’s Pride and Prejudice
3 Howard Jenkins (2016) Same old sugar story. ADMISI – The ghost in the machine. September-October, pp4-5