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ANALYSIS: Sugar market like juggling water right now

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When the world’s third-biggest sugar maker and ethanol producer sends a letter to suppliers asking for a 7% price reduction because of falling sugar prices, shivers go through the sugar world.

 

That’s what French group Tereos has requested.

 

The weakness of sugar prices is one indirect consequence of the current struggle over crude oil production between Saudi Arabia (now joined by the United Arab Emirates) and Russia.

 

Crude oil prices, which are about 50% lower than in January, shed another $2 per barrel today after President Trump imposed a ban on all flights between mainland Europe and the US.

 

This Saudi-Russian price war could last well beyond 2020 as both sides have very deep pockets. Russia’s finance ministry has said it would rely on its $150bn national wealth fund and that it can sustain lost revenues from ultra-low oil prices for a decade.

 

Sugar prices - lower for longer maybe

 

The May raw sugar contract on the ICE exchange slipped by 2.7% on Wednesday to 12.26 cents per pound.

 

The oil price war will drag down ethanol prices, and so Brazilian sugar cane crushers are juggling water right now, trying to decide whether to maximise production of sugar or ethanol.

 

They have maximised ethanol production in the last two crop seasons, taking advantage of what has been an average 7% above the five-year price for ethanol. Forecasts are now in the market for sugar prices to average 12.5 cents per pound in for the 2020-21 season.

 

A dilemma for US plantings too

 

US (corn) ethanol production has so far this season (September to August been 0.3% above the previous year but is declining, as margins fall.

 

US farmers can delay corn planting to mid-April and soybeans until May, if weather conditions permit.

 

Roughly 40% of US corn goes into ethanol in a typical season - but this season is going to be far from typical. We might see a much bigger area planted to soybeans, if the crude oil/ethanol price remains historically weak.

 

The joint impact of Covid-19, which as the world tightens controls and therefore enters a period of slower economic activity, and the crude oil price ’war’ are daily shifting expectations.

 

It is not surprising therefore that investors are sitting on the sidelines, awaiting a clearer direction.

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