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Will US dollar cap further gains in the sugar futures market?


Sugar futures hit a one-month high this week helped by the near-term tightness cause by restrictions on India’s exports of raw sugar. However, the strength of the dollar, which has risen by over 20% against a basket of major currencies in the last 12 months, is acting as a cap on further price increases.

India could soften its stance on sugar exports

Earlier this year India decided to restrict its exports of sugar for the first time in six years in order to keep prices in check. The country is the world’s largest producer and the second largest exporter of sugar after Brazil and has been struggling with domestic price increases in the wake of Covid.

Indian domestic inflation has risen to just under 8% in the first half of this year. However, the sugar tap has not been switched off completely – far from it. India produced a much higher amount of sugar this year and by May had already exported more than in the previous 12 months.

In May the country brought in administrative hurdles for exporters wanting to sell sugar in the five-month period between June and November and has restricted the overall amount of sugar that can be exported in this marketing season to 10 million tonnes. Of that, 8.6 million tonnes had already left the country by May, meaning that the outflow over the coming few months will be much slimmer.

By the end of June domestic sugar mills started grappling with high levels of sugar stocks and have asked the government to loosen the restrictions. The response has been lukewarm but has not been an outright “no”.

Looking at the worldwide supply picture, the European Commission expects the sugar market to be in a deficit of 0.2 million tonnes in the 2021/2022 season, with Brazil, China and Turkey producing less sugar than in the previous season and India and Thailand making up some of the shortfall with their higher production. The current forecast for the global deficit has been reduced after Brazil said it expects to increase its production by 15% in the next marketing year.

Demand picture depends in part on China’s post Covid recovery

In terms of demand much will depend on how China pulls itself out of the grip of Covid. The country is the world’s largest consumer of the white commodity, and its domestic demand has been affected by lockdowns in its two biggest cities, Beijing and Shanghai. Restrictions on movement, the inability to work from offices, and restricted shopping have played a role in China’s consumption level of all commodities. Data Friday showed that the country narrowly avoided recession in this quarter because of weeks of lockdowns in urban centres. But the situation remains dynamic and if China emerges from the pandemic quickly, demand for sugar will also pick up fast.

At the height of the global Covid pandemic in 2020 prices of sugar futures fell to 9c/lb. but by the autumn of 2021 they more than doubled to 21c/lb. Prices are now trading very close to 19c/lb. slightly lower than at the 2021 peak but still more than twice the level during 2020.

WisdomTree Sugar ETFs

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Sugar
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
WisdomTree Sugar 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
WisdomTree Sugar 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
WisdomTree Sugar EUR Daily Hedged

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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