At a big gathering of the great and the good in the sugar trading fraternity in New York last month, there was much talk of the activities of hedge funds in the sugar market. Funds had built one of the biggest overall short positions in sugar futures in almost two years, and there was speculation as to when those shorts would start to be unwound. It was also noted that sugar prices were down 17% since the beginning of the year, so good news if you are short this market.
The question for many traders is going to be when the turning point occurs, and this is always the time when conversation shifts to ethanol. The relationship between sugar and ethanol suggests the price of ethanol can be a good support indicator for sugar.
It’s all about Brazil
Brazil lies at the heart of what futures traders and analysts like to call the ‘ethanol parity floor’. This is a big factor in sugar trading. The country is not only the biggest single sugar producer globally, it is also geared up for running its cars on a mix of fuel and ethanol. The same goes for India. When sugar gets cheap enough, the big sugar mills in Brazil switch from producing sugar to producing ethanol. Hence sugar traders always have one eye on the price of ethanol when the sugar price is going down, as it has been for most of this year.
Marex Spectron, one of the leading institutional commodity brokers, says a shift to ethanol production can potentially take some 6 million tons of sugar off the market. But where is ethanol parity? Views differ. Sucden Financial puts it at about 15 cents/lb.
Traders should also pay attention to what the big market participants are doing, as these will shift sugar prices considerably. They will be watching the same benchmarks as everyone else. The US CFTC also provides plenty of data on what the net sugar positions look like on a day to day basis, so it is possible to gauge what the funds and other speculators are thinking.
So where now for sugar?
There are obvious signs that sugar’s decline is almost over. Indeed, 2017 could end up being a game of two halves for sugar.
“Against the backdrop that suply will grow considerably in nearly all important producer countries, an improved sugar supply and considerable surplus are likely,” explains Eugen Weinberg, a commodities analyst with Commerzbank in Frankfurt. “High speculative net short positions suggest that a lot of bearish news has already been priced in, though. We think the sugar price decline has now become exaggerated and expect a recovery to slightly higher levels.”
For Q4 2017, Commerzbank is calling sugar at 14 cents/lb with a moderate recovery out to 14.5 next year. This clashes a little with Sucden’s 15 cent ethanol parity level of course. If those Brazilian mills really do start spending more time producing ethanol than refined sugar, the price is likely to climb beyond 14.5.
However, French bank Societe Generale says traders should also note that the ethnaol parity floor is itself flexible. They think it is now around 13.5 cents. Traders should consider some other factors of note, among them the price of the Brazilian real, the price of oil (as Brazilian cars can run just as well on cheap petrol as cheap ethanol) and the pricing policies of the Brazilian state oil giant, Petrobras. White sugar prices are trading at just below the break even level for EU producers of €400 per ton.
“We reiterate that sugar prices will continue to be driven by sugar-ethanol parity in Brazil and potential imports by India,” says Rajesh Singla, a commodities analyst at Societe Generale. “A sharp decline in prices to below the current sugar-ethanol parity floor of 13.5/lb could shift some sugarcane from sugar to ethanol in Brazil and could raise questions on the potential for acreage expansion in the EU and Brazil in coming years.”
Let’s not forget weather either: seasoned traders will be keeping an eye on weather patterns in Brazil, as these can have a major impact on both the sugar and coffee harvests.