Sugar: high price will last for some time yet
Aug 14, 2009
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Commodities are on a roll, with zinc, copper and oil all recently reaching their highest levels of 2009. But the raw material hitting the headlines now is sugar. Benchmark raw sugar futures this week reached a 28-year high of 22 cents per pound, up 76% this year.
Only during the price spikes of 1974-75 and 1980-81 has sugar traded higher; it hit a record 66 cents in 1974. And the uptrend is unlikely to be over just yet. While many commodities are being boosted largely by overall risk appetite, the key feature of the sugar market is a "genuine shortage", says Eugen Weinberg of Commerzbank.
Sugar is in short supply...
The El Nino phenomenon, a warming of the Pacific that shifts weather patterns around, is the main problem. This has led to a drought in India and unusually wet weather in Brazil, countries that account for around 40% of global production. India has suffered its driest June in 83 years and the monsoon rains have continued to disappoint.
Production estimates for the 2009-10 season (beginning at the start of October) have been continually revised down and are currently expected barely to exceed last year's figure, which undershot consumption by 8 million tonnes. For the second year in a row, India will have to import sugar, and according to Dhampur Sugar Mills, imports may be four times higher than last year's figure.
There is also "increasing uncertainty" over Brazilian production, which many had hoped could make up any shortfall from India. But unusually high rainfall, thanks to El Nino – expected to continue into August – is delaying the harvest and lowering the sugar cane's sucrose yield, which reduces potential output.
What's more, as Axel Herlinghaus of Deutsche Bank points out, production capacity is limited as most of the new mills set to come on stream can only process ethanol. Initial estimates of Brazilian output now look too high and so the projected sugar deficit in 2009-10 is "growing by the day", says Barclays Capital.
That's also because production elsewhere, including Russia, Mexico, China and the EU – which has swung from exporter to importer following reform of its sugar market – is falling short. Demand, meanwhile, is "relatively inelastic", says Lex in the FT. In India, for instance, it is expected to rise 3% this year despite higher prices. According to the International Sugar Organisation, global consumption will exceed production for the second year in a row in 2009-10, and the two-year shortfall marks a record.
... so prices could rocket
History shows that whenever production falls short of consumption for two years in a row, inventories become seriously depleted and the price of sugar "starts to take off", says Manraaj Singh, chief investment strategist at Profithunter.co.uk.
The ratio of inventories to usage this year will drop to 11%, the lowest since 1975, says the US Agriculture Department, which also expects India's inventories to fall to under three months' consumption.
Globally, stocks are estimated at close to record lows, says Chris Flood in the FT, and food companies and governments "have had to compete for tightening supplies". Speculators have also discovered the sugar story, says FAZ.net; bets on rising prices have climbed to an 18-month high.
Given all this, another sugar spike may be building; Mizuho Corporate Bank is pencilling a price of 30 cents per pound. As the FT's Lex puts it, "this sugar high looks set to run and run". For those tempted to risk a punt on this volatile commodity, an exchange-traded commodity listed in London (SUGA, $19.36) offers access to the sugar market.
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