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ANALYSIS: Sugar prices stumble along with crude oil in a stop-start tango

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After having risen last week by around 10% (the July sugar contract settled last Friday at 12.02 cents per pound, 2.5% up on the previous day) it was perhaps inevitable that it closed lower yesterday, at 11.94 cents per pound.

 

The raw sugar contract is paying attention to other markets - and the most important of those for sugar is crude oil. Markets last week looked to Saturday’s meeting of Opec+ (the Organisation of Petroleum Exporting Countries and their associates) to extend the 10m barrels per day production cut. It didn’t disappoint and agreed to extend the cut through July.

 

The wild swings of March and April, the darkest days of Covid-19, have eased. Wall Street’s S&P 500 index is now flat for 2020 after having lost a third in March.

 

Risk-on, risk-off

 

But although the trees are thinning, we’re not yet out of the wood. Brent crude oil, the international benchmark, is trading around $40 a barrel, a loss since the start of 2020 of more than 60%. It will take a while for stuttering demand recovery to erode the global crude oil storage, and thus put fire into the belly of Brazilian ethanol producers.

 

Yet raw sugar prices have helped up remarkably well during the Covid-19 tornado. Since the start of the year prices for raw sugar have dropped by about 14%.

 

Sugar’s dual use - both as sweetener and as key ingredient in fuel ethanol - complicates any assessment of actual sugar demand.

 

In its latest sugar report the broker Marex Spectron gives testimony to the current complicated picture. While the sugar analyst talks of a "looming surplus", anticipating a significant global demand drop of 2.5-5% year-on-year, another analyst in the same report postulates a "firmer macro outlook for sugar".

 

Sugar demand

 

The messy truth inevitably lies somewhere in the middle of those two views. Estimates of the global sugar balance for 2019-20 and 2020-21 vary wildly, as do calculations of global ending stocks for 2020-21.

 

The short-term outlook for sugar remains very murky. It will stay that way until the crude oil market returns closer to a supply-demand balance later this year, and drags fuel ethanol prices higher. Since the start of the year we have seen huge sugar price fluctuations, from a peak of 16 cents per pound to a low of 9 cents. As Marex Spectron acknowledges, gauging sugar consumption is "impossible".

 

Longer-term - i.e. once the Covid-19 clouds have cleared - the world will obviously be a different place. This global shock will give greater impetus to nascent revolutions, not least "greener" alternatives such as electric vehicles. Some of those changes will linger. The rise of the electric vehicle will eventually impact demand for crude oil and ethanol, although this revolution is hardly started - only 6% of the world’s cars are currently electric.

 

But one fact is unchanging - the inelasticity of demand for all food types, especially sugar.

 

Will the world’s drivers get back into their vehicles? They already are. Will global sugar demand continue to rise? No question of it.

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