According to USDA, about 160 million metric tons of sugar are produced every year. The top five producers of the commodity, as of 2012, include Brazil, India, the European Union, China and Thailand. The US is the sixth largest producer of sugar. Another thing to note is that Brazil is by far the largest exporter of sugar in world. Due to the fact that the global sugar market is big, the futures market for sugar has also grown significantly over the year. The Sugar No. 11 contract is the world’s benchmark contract for raw sugar trading. Sugar futures are traded on the ICE and NYMEX under the symbols SB and YO respectively. Below are the top factors that move sugar prices.
Since late 2011, the sugar market has been down. For the most part, the downward trend is a result of world production surplus. Therefore, in general, rising global sugar production usually send prices lower, as it signals a possible equilibrium, or overweighing of demand. On the other hand, decrease global sugar production is also likely to sends sugar prices high, as it signals a potential reduction in supplies.
For instance, the International Sugar Organization, or ISO, reported on August 26 2014 that sugar recovery is unlikely, saying that the surplus in the sugar market is still huge, despite cutting on its surplus production forecast for the 2014-2015 season to 3.99 million tons. The point here is that in order to profit from sugar prices, it is important to watch global sugar production trends at all time, as it is the biggest short-term and long-term mover of sugar prices.
The is a second part to the story of declining sugar prices from above, and that is global consumption outlook for sugar. While increasing production on its own is sufficient to drive prices lower, you should expect a worse outcome when it is accompanied by a weak global consumption – outlook. This is exactly what has happened in the sugar market. Therefore, if, and when, the consumption outlook of sugar becomes positive, chances a surge in sugar prices will follow. However, for some reasons – health, for instance – it is unlikely that the consumption of sugar would see any significant surge in the near future.
In summary, a positive consumption outlook drives sugar prices up, while a weak consumption outlook drives prices lower.
The Brazilian and Chinese effect
In simple terms, events in Brazil and China affect the sugar market because Brazil is the world’s largest producer of sugar, and China is the third largest producer – magnified by the fact that it has the second largest economy in the world and the largest population.
Investors should monitor events, such as governmental regulations, crises in these countries as they could affect prices. You also want to look at the weather outlook in these countries.
For instance, Barrons reported on August 9, 2014 that sugar prices might soon rise, owing to the unprecedented drought that Brazil witnessed in the early part of the year. As you would expect, the drought would affect farm outputs, which might reduce the growing global stocks.
Sugar has historically shown significant correlation to inflation rates. As a matter of fact, it is considered an inflation-hedging tool. This makes it a good candidate for a well-rounded portfolio. As the chart below shows, the price movement of sugar generally correlates with the US inflation rate.
This means that in inflationary environments, you can expect sugar to perform fairly – at least, relative to other agricultural commodities. However, it is important to point out here that there is no one-for-one relationship between inflation rate and the price of sugar. In other words, there are bound to be disparities at times.
Sugar, most of which is gotten from sugarcane, is highly weather sensitive. In simple terms, it requires frost-free climate with sufficient rainfall during the growing season. Therefore, any weather condition that differs from this is likely to hamper sugar production, which will send prices higher. As stated earlier, serious drought in Brazil is said to have affected productions, hence, prices are expected to go up.
In general, though, you want to keep tabs on the weather outlook in top sugar producing nations, as it indicates what the global sugar production might be.
The ethanol effect
The effect of this is not very huge at the moment. However, with the increasing demand for clean ethanol, this could be a big driver of oil price in future. The ethanol market affects the sugar market mainly because sugar byproducts are used to make ethanol. So as the demand for sugar-based ethanol grows, sugar prices might also go up.
Moreover, since ethanol is already in the picture, there is also a growing relationship between oil prices and sugar price. Here is why. As oil prices go up, the demand outlook for alternative fuels, the class to which ethanol belongs, become positive, thereby driving prices up. So it means that as more of sugar is employed in the ethanol industry, sugar prices will become susceptible to factors that move oil prices.
This is one of the biggest threats to global sugar consumption. Researchers have found that the consumption of sugar is associated with diabetes, obesity and tooth decay. Therefore, governments around the world are looking to solve these health problems. This may lead to the elimination of the use of sugar, or an increased use of alternative sweeteners. In both cases, the consumption of sugar will decrease continuously for some time. For what it is, this one of the reason for the weak global sugar consumption in recent years.