The Ghost in the Machine – Sugar Treat

At past ADMISI Sugar Treat events, I dust off my crystal ball to look into the future trying to predict production, consumption and, of course prices. While there is no London Sugar dinner this year I thought it is an opportunity to do the same in this article.

Back in the middle of October 2018 sugar prices were higher than current levels. They had just started to improve from a 10 year low after a two-year decline from over 23 cents. Raws were trading at 13.40 and whites at 371.00 so the nearby white premium was valued around 75.00. However, elsewhere it was a different world. WTI was close to $70 per barrel and the Brazilian real was at around 3.75. The funds were around 48k lots short. The decline in prices had been triggered by massive global production in the 2017/18 season. The season was extraordinary in many ways. Unprecedented perfect weather for growing sugar cane and beet was seen right across the globe. Virtually all the world’s major producers; Brazil, India, Thailand, the EU and the United States, produced record amounts of sugar resulting in a massive surplus of over 10 million tonnes. However, the 2018/19 season saw a drop in global production as low prices began to bite despite another record Indian production. A global deficit of around 1 million tonnes was seen. However, stocks from the previous season weighed on prices which remained in a very narrow range.

Fast forward to the present day and the world is a very different place. The Covid-19 pandemic has caused unprecedented change. The world economy has been hit very hard. Stocks markets crashed, crude prices collapsed and commodity prices followed as the world went into lock-down. While the situation has improved from the dark days of March and April it is still a very uncertain world. Sugar has, of course, not been immune, hit by a double whammy of the unexpected increase in Brazilian production and a drop in global consumption. At the beginning of the year analysts were predicting a sizable global deficit in production for 2019/20. Price responded by rallying to their highest level in two years in February only to sink to a ten year low as the pandemic took hold. A deficit of just over 2 million tonnes is still predicted for the current season but analysts expected the 2020/19 season, which starts in October to move back to a global surplus.

So how large a surplus? Global production is likely to increase with Brazil and India leading the way. We are getting well into the second half of the 2020/21 Brazilian CS harvest and sugar production, as at the end of August is over 43% higher than at the same time last season. This is due to two factors. Firstly, the huge drop in ethanol demand due to low crude prices and the impact of the lock-down on fuel usage in Brazil. Secondly, the weakening of the Brazilian real which has dropped from 4.00 to 5.35 against the USD this year. The combination of these two factors has meant sugar production has become much more profitable than ethanol. For the past two seasons Brazil has struggled to get sugar production above 30 million tonnes. This season their total production could breach 40 million tonnes. India’s production is likely to return to close to the record levels seen in 2018/19 of just over 33 million tonnes after dry and then very wet weather hit their cane crop last season when total production barely reached 27 million tonnes. EU production is likely to drop to around 16.2 million tonnes from 17 million tonnes with dry weather and disease causing issues with the banning of neonicotinoid pesticides in many EU states. The biggest decline is likely to be in Thailand. Back in 2017/18 the country produced a record 14 million tonnes of sugar. Next season some analysts believe production could halve to just over 7 million tonnes due to a prolonged drought and competition from other crops primarily Cassava. It is likely Chinese and Russian production will drop next season due to weather issues but in no meaningful way. Currently, most other producers will see similar production levels to the current season. Therefore, total global production is likely to hit around 181 million tonnes in 2020/21.

Consumption is much harder to predict. Never easy in the first place but add in the pandemic impact and it becomes even more difficult. Most analyst see consumption having taken a hit because of the global lock-down. Therefore, total consumption has probably dropped this season for the first time in living memory year on year. The big question is whether it recovers next season. Despite the on-going pandemic consumption could start to creep back to levels seen before the pandemic as the world begins to live with the virus. However, a possible global economic recession could also impact on demand. The usual increase because of population growth will also help. But, it is a very uncertain situation especially as sugar consumption has been targeted as being unhealthy with sugar taxes being introduced across the world. The debate on whether it is necessary to get people to limit their intake of sugar and whether taxing sugar products has the desired effect on obesity levels will continue. The historic linear increase of 2% a year in consumption is unlikely to be resumed for the time being.

Therefore, for 2020/21 season global production is likely to rise and consumption static at best. This suggests a production surplus of 3-4 million tonnes. This means global stocks are likely to increase. India has struggled to export its surplus over the past three years and has had to resort to giving ‘incentives’ to farmers much to the anger of other major producers.

Assuming a meaningful surplus for next season prices are unlikely to improve considerable from their current levels. Indeed, they could slip lower but it would seem unlikely to see a collapse to the levels of April. A recent Reuters poll had 12 cents as the expected level by the end of the year.

All the above is based on the current fundamental and macro picture. In these exceptionally uncertain times much can change. The world economy is very fragile and no one knows the course the pandemic will take. Will the USD continue to weaken? A weather issue could change the fundamental picture. The ‘La Nina’ weather phenomenon has recently developed. Could that bring drought conditions to the CS regions of Brazil? Will the Indian monsoon end with flooding of the cane crop as happened last year?

Let us hope that by the time traders do congregate again in London for the 2022 dinner the world is back on its feet and sugar prices are much closer to 20 than 10 cents.