Sugar futures prices up by more then 13.6% in September

Sugar prices have risen, not because of sugar in coffee, cakes or chocolate, but because of sugar in fuel. Sugar prices are up 13.6% on the month and are more than 50% higher since the start of the year mainly because of what is happening in the ethanol market.

Ever since the war in Ukraine created a tightness in global fuel supplies the US has been mixing more ethanol into its car fuel – partially to keep domestic prices lower after a significant chunk of US production was being shipped to Europe.

In the second quarter of this year demand picked up even further after the US Department of Agriculture said it planned on investing $500 million to increase the domestic availability of biofuels. This was followed up by some large ethanol buy additional orders from the biofuels industry which came on top of the already existing regular demand from biofuel plants operating at stable rates.

Now ethanol is trading at $2.395 a gallon, up 6% on the week and 12% on the month.

Why does it matter for sugar what the ethanol price is doing?

The US and Brazil are the two largest ethanol producers and consumers, and on top of that, are linked in an import-export relationship. Brazil – the world’s second largest producer of sugar – is a large importer of US ethanol (the country buys roughly 76 million gallons a year) but following changes in ethanol import tariffs in March imports from the US have declined. Instead, the domestic production of ethanol has increased.

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As Brazil produces ethanol from local sugar cane ethanol and sugar producers are in fact in direct competition for their raw material and the prices of the two commodities are closely linked.

The processing mills in Brazil’s main sugar and ethanol producing region are equipped to process either of these commodities and will decide which ratio of sugar and ethanol to produce depending on the returns they can make.

To make things a bit more complicated the oil price also plays a role. The more expensive crude oil becomes the more demand there is for ethanol, a cheaper alternative.

In Brazil around 80% of cars are equipped to run on gasoline and/or ethanol. Over the last month Saudi Arabia’s decision to extend existing oil production cuts for several months has pushed up WTI prices to $90.2 a barrel, up 14.4%, and Brent crude prices to $93/bbl, up 3.3%.

According to Reuters analyst John Kemp, portfolio investors bought a large amount of crude oil futures and options at the start of September – the week before Saudi Arabia said it would extend its existing production until the end of the year. The planned extension is expected to deplete the already below-average US crude oil stocks.

With that in mind, crude prices could remain at a higher level over the coming weeks, in turn supporting demand for ethanol.

While this is supportive of strong sugar prices, one potential dampener could be an increase in Brazilian sugar crop this year. This, however, is likely to be balanced out by India’s slightly lower than expected output this season.

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