Sugar price moving higher on oil and Brazil ethanol switch

Sugar prices have spiked over the last few weeks, indirectly reacting to the conflict in Ukraine and the consequent rally in oil prices. Oil prices play a key role in global sugar prices because they determine whether Brazil, the world’s largest exporter of sugar, uses its sugarcane output to refine into ethanol or into sugar.

As global oil markets have been shaken by the conflict in Ukraine, the subsequent sanctions on Russia and the disruption in oil supplies, crude oil prices have risen from $77 a barrel in January to over $120/bbl last week. Sugar has replicated some of that move in the last few weeks. WisdomTree’s sugar ETF SUGA has rallied from $8.67 in January to trading at $9.74 on Thursday.

The Brazilian link

While Brazil produces only slightly over 20% of the total global sugar output, the country accounts for 45% of the world’s exports, well ahead of the next two exporters, Thailand and India.

Given its relatively low domestic income, Brazilian cars have for years been converted to run on a mixture of gasoline and ethanol. Known as flex fuel vehicles, not only can they switch from using petrol to using ethanol, they can also run on a mixture of petrol and ethanol using any proportion of the two fuels. Around 80% of cars in Brazil are flex fuel cars which means that any fluctuation in global petrol prices has a massive and swift domestic demand response.

As the biggest global sugar producer Brazil is exceptionally well prepared to react to changes in the price of petrol and sugar. Most of the country’s sugar cane is processed in Centre-South Brazil and 75% of the sugar mills there have the capacity to simultaneously produce sugar and ethanol. Depending on the prices of the two commodities the mills decide on a short-term basis whether to produce sugar or ethanol, or a mixture of the two.

The price relation between petrol and ethanol is not a simple one. Petrol is much more energy dense and although ethanol is far cheaper it takes more of the fuel to run a car. Mills will decide whether to produce sugar or ethanol based on something called sugar ethanol parity: a point at which sugar and ethanol cost the same and can create the same return for the mills. While oil prices are as high as they are now, mills are favouring ethanol over sugar.

Other factors for sugar trading

Czarnikow, one of the world’s largest sugar trading companies, expects sugar prices to move higher over the coming few years as ethanol production increases. India, the world’s third largest sugar exporter, has set itself a target of ethanol making up 10% of the domestic gasoline mix this year and 20% of the blend by 2025, which will see more of the domestic sugar output diverted into ethanol production. Before Covid India’s gasoline demand was growing at around 7% a year.

There is no doubt that other suppliers will increase their production to cover the shortfall, but this will require additional investment and time. However, if prices remain high, Brazil and Thailand may be incentivised to increase production which will eventually dampen prices.

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