Sugar, the world’s sweetest commodity and Australia’s second-largest export crop, is trading near 12-month highs on supply disruptions related to the El Nino weather pattern.
Raw sugar futures spiked to $16.71 a pound on March 23, having gained a staggering 31% over four weeks. Prices have since consolidated around $15.18 an ounce, having gained nearly 20% year-over-year.
The sugar rush has been largely driven by growing concerns about supply disruptions due to El Nino, a complex weather pattern characterized by variations in ocean temperatures in the Equatorial Pacific region.[1] For practical purposes, El Nino usually means the appearance of abnormally warm weather that occurs every few years. For Australian farmers in particular, El Nino causes much dryer growing conditions that can threaten output in the world’s fourth biggest grain exporter.
According to commodity analysts, dry weather in Eastern Australia is forcing some growers to “dry sow” wheat, which is considered highly risky because top soil could erode more easily than conventional sowing.[2]
The impact of El Nino on raw sugar output has been noted by the International Sugar Organization, which in February said the production deficit for the current crop year would be bigger than previously forecast. The London-based intergovernmental body said world production in the 2015-16 crop period will trail consumption by 5.02 million metric tonnes, well above its November estimate calling for a 3.5 million tonne shortfall.
“A statistical deficit is clearly supportive for world prices,” the ISO said in a report. As a result, prices “can be expected to trend generally higher in the remaining months of 2015/16.”[3]
Raw sugar prices surged by the most in 22 years immediately after the ISO release. The futures price spiked nearly 9% on February 23, the start of a four-week boom for raw sugar.
Prices had bottomed at $12.70 per pound earlier in the month before staging the dramatic recovery. According to analysts, volatility has been a mainstay in the raw sugar market so far this year. In this sense, sugar has been not unlike precious metals and energy, which have experienced sharp price fluctuations since the start of 2016.
“We’ve seen a lot of volatility in 2016 and a lot of that has been speculators of funds selling in and out,” said Georgia Twomey, an analyst at Dutch bank Rabobank. “But the recent lift is fundamentals again starting to drive the price.”
For Twomey, the supply deficit for 2015-16 is about 6.8 million tonnes, well above the ISO estimate.
“We’ve got tightened production out of Asia, in particular, which is causing the deficit, and consensus is for the decline to be a fairly wide one in 2015-16,” Twomey added.[4]
Rabobank’s global outlook on raw sugar prices suggests that the next few months will be especially important.
“The next few months will bring confirmation regarding key crops in Asia – above all, Indian and Thai output should be clearer – plus some early indicators of the potential for important northern hemisphere crops,” the bank said, as quoted by The Sydney Morning Herald.[5]
Another major driver of global sugar prices is Brazil, which is the world’s largest exporter of the commodity. Brazilian sugar not only impacts the price of sugar in the global market, but also the Brazilian real.
The real has surged against the dollar in the past four weeks, with the USD/BRL (US dollar to Brazilian real) exchange rate plunging over 10% during that period. The real has been riding the wave of a political crisis that could result in a change in government in Brazil. In an investigation dubbed “Operation Car Wash,” Brazilian authorities have uncovered a multi-billion-dollar money laundering scheme involving Brazilian government officials. More than 130 people have been arrested so far.[6]
Up-and-down sugar prices only scratch the surface of commodity market volatility this year. The price of oil bottomed at 13-year lows in February before staging a dramatic 50% recovery over the next six weeks. Gold and other precious metals have also declined sharply in recent weeks after enjoying a sustained rally through the first half of the first quarter.
Volatile commodity prices could weigh on an already shaky global financial system, which dug itself a huge hole through the first six weeks of the year. Much of the rally in US equities since mid-February has been attributed to the oil price rebound.
While commodity prices ranging from energy to agriculture are expected to remain under pressure for the rest of the year, raw sugar futures could reach new highs on continued supply fears. The ISO data made it abundantly clear that El Nino is not over and could impact production in places like Thailand and India.[7]
[1] National Oceanic and Atmospheric Administration. What are El Nino and La Nina?
[2] Reuters News Agency (April 1, 2016). “As El Nino liners, some Australia farmers may have to ‘dry sow’ wheat.” Producer.com.
[3] Marvin G Perez and Melissa Mittleman (February 23, 2016). “Sugar Surges Most in 22 Years on El-Nino-Driven Supply Shortfall.” Bloomberg News.
[4] Stephen Cauchi (March 28, 2016). “Sugar rush as El Nino hits production.” The Sydney Morning Herald.
[5] Stephen Cauchi (March 28, 2016). “Sugar rush as El Nino hits production.” The Sydney Morning Herald.
[6] Sam Bourgi. “USD/BRL: Real Advances for Third Week amid Brazil’s Deepening Political Crisis.” Economic Calendar.
[7] Marvin G Perez and Melissa Mittleman (February 23, 2016). “Sugar Surges Most in 22 Years on El-Nino-Driven Supply Shortfall.” Bloomberg News.
