Sugar futures prices are riding high

Sugar prices have held up well amid a wider selloff of commodities triggered by the collapse of Silicon Valley Bank and investors’ move to more cautious position holding. The white commodity was boosted by a near-term tightness in the market, helped by logistics problems in Brazil, the world’s largest sugar farmer, where the distribution of sugar was hampered by delays at ports and backlogs on roads and rail.

Also, India, the world’s second-biggest sugar producer, is subsidising the construction of additional sugar cane ethanol distillation for use in transport, which means that any sugar not already bound in export contracts this year will be diverted to domestic ethanol production.

Mid-term outlook

Sugar prices have more than doubled since 2020 and raw sugar today is trading at above 20 cents a pound. There is still scope for smaller-scale rallies this year although the surplus of sugar expected to be produced in the 2023/2024 crop year will somewhat limit the upside. Yet traders have their eyes set at 23 cents a pound, which is still above the six-year high hit at the end of February of 22.36c/lb.

While the higher production expectations should in theory be a reason for an outright decline in prices, this is also unlikely as over the last two years seed costs, fertilizer, diesel and power prices have also become more expensive. Fertilizer supply is becoming a wider industry problem with tightness forming that will not only affect soft commodities like sugar but also major crops like wheat, corn and soy.

For the moment the sugar market remains in backwardation, that is, near-term prices are higher than forward prices, which should not be the case given that future prices also include additional costs such as storage. But backwardation also means that traders and intermediaries are buying and exporting sugar quicker than usual in order to maximise profits. For the moment, speculative investors and funds are heavily long of sugar futures.

Oil prices versus sugar

Since the start of the month, sugar prices have come down slightly, in part because of a decline in oil and gas prices. This is because in both Brazil and India, and in other developing economies, nearly half of the overall farmed sugar is used to produce ethanol. The cheaper traditional fuel gets, the less sugar is diverted into ethanol. But the decline in oil prices is not here to stay.

Firstly, most of the decline in oil was not a reflection of a true supply and demand picture and had more to do with investors’ weariness in the wake of the Silicon Valley Bank failure. As markets pull out of this uncertainty, so will oil prices. In addition, this week oil cartel OPEC revised its expectations for Chinese oil demand this year, which will be the dominant influence in the mid-term.

Sugar still has some way to go before the rally runs out of steam and it is likely to be a case of a quick in and out over the coming months rather than a buy and hold.

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