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Sugar news, weather, pricing, production and predictions
Welcome to the deep dive. Today, we're getting into something you probably interact with almost every day, sugar, and specifically why its price is just so volatile.
Speaker 2:It really is.
Speaker 1:Yeah. I mean, if you've watched the market, say, over the last fifteen years or so, you know it swings wildly. You might think, okay, it's a crop, it trades like corn or wheat.
Speaker 2:Right, basic supply and demand.
Speaker 1:Exactly. But our sources are showing that its price moves, especially from around 2010 up to now, well, they're driven by much bigger global macro forces.
Speaker 2:That's really the nut of it. To understand why raw sugar prices can jump or crash so dramatically, you really have to look beyond just how much cane is growing. We're going to walk you through four, let's call them non traditional levers, that really shape where sugar prices go.
Speaker 1:Okay, so these levers are what? We're talking currency swings in places like Brazil and India.
Speaker 2:Yep, currency is huge. Then there's this constant battle between using sugarcane for food versus fuel, that's the ethanol connection.
Speaker 1:Alright.
Speaker 2:Then you've got broader macro stuff like rising costs for farmers, interest rates, that sort of thing. And finally, global logistics, think shipping bottlenecks and how they create almost a psychological effect too.
Speaker 1:Got it. Our mission today is basically to equip you, the listener, to see sugar less like just a sweetener in your coffee.
Speaker 2:And more like a complex macro driven commodity. We wanna give you those moments, you know?
Speaker 1:Yeah.
Speaker 2:The points where it clicks, why the price does what it does, and maybe what to watch for next.
Speaker 1:Okay. Let's jump in. First, lever, currency. Brazil and India, massive producers. But how does the value of the Brazilian real, for instance, actually set the global price?
Speaker 1:That seems indirect.
Speaker 2:Well, it feels indirect, but the connection, especially with Brazil, is incredibly direct. Brazil isn't just big. It's the largest exporter by far. And its currency, the real or BRL, has this really strong inverse relationship with world raw sugar prices. That's the NY tag 11 benchmark you see quoted.
Speaker 1:Inverse. So weak currency means lower sugar prices or higher.
Speaker 2:Inverse means when the Brazilian real gets weaker. So 1 U. S. Dollar buys more rays, global sugar prices tend to go down.
Speaker 1:Okay. Walk me through that. How does a weak real push prices down globally?
Speaker 2:It's actually pretty straightforward for the Brazilian producers. When the real weakens, their production costs effectively drop. Sugar becomes cheaper for them to make and sell internationally.
Speaker 1:Ah, so they have a bigger incentive to export.
Speaker 2:Exactly. They push more sugar onto the world market because it's more profitable for them in dollar terms, even if the global dollar price itself hasn't changed much yet. That flood of cheaper Brazilian sugar then forces the global price downwards.
Speaker 1:So the sheer volume from Brazil means their local currency moves can actually dictate the world price.
Speaker 2:It has a huge influence. Just look at the data from say 2011 to 2020. It's quite stark. Over that period, sugar prices in US dollars fell. I think it was around 71%.
Speaker 1:Wow. A massive crash.
Speaker 2:Huge. But crucially, over that same period, the Brazilian real also weakened dramatically. Its value fell by about 73% against the dollar.
Speaker 1:Wait a minute. So if the dollar price fell 71%, but the currency fell 73%.
Speaker 2:You got it. For the Brazilian producer selling sugar, the price they received in their own currency, in BRL, stayed almost exactly the same.
Speaker 1:So they were completely shielded from that global price collapse by their own weakening.
Speaker 2:Precisely. The weak real essentially absorbed the entire global price shock, and because they weren't feeling the pain, they kept producing and exporting huge amounts, which in turn helped keep that global dollar price suppressed for years.
Speaker 1:That's a really powerful mechanism. Okay. So that's Brazil where the market and the currency seem quite linked. What about India? Second biggest producer.
Speaker 1:Is it the same story with the Indian rupee?
Speaker 2:It's, well, it's more complicated with India. The rupee, the INR does play a role. Absolutely. A weaker rupee makes Indian sugar more competitive on the export market, just like in Brazil. It boosts the revenue in rupees for every dollar they earn selling sugar abroad.
Speaker 1:Okay. So similar incentive.
Speaker 2:Similar incentive. Yes. And that helped drive their record exports back in the twenty twenty one, twenty two season, but, and this is a big shirt, but India uses policy much more actively to manage its domestic market.
Speaker 1:Take
Speaker 2:2023 as an example, Global sugar prices were really high, near multi year peaks, and the rupee was relatively weak, which should have been a massive green light for Indian mills to export everything they could.
Speaker 1:Right, perfect conditions for them.
Speaker 2:You'd think so. Yeah. But the government in New Delhi stepped in and put restrictions on exports. Why? To keep domestic sugar prices low for Indian consumers.
Speaker 1:Ah, prioritizing domestic stability.
Speaker 2:Exactly. And the effect was clear. Local Indian sugar prices ended up being something like 38% cheaper than the global benchmark for white sugar at the time. It's a clear case where government policy just completely overrode or trumped the signal from the foreign exchange market.
Speaker 1:So Brazil drives the price via currency, while India often buffers it with policy. Interesting contrast. Okay. That leads us nicely into the next big factor you mentioned, the food versus fuel thing, the ethanol connection.
Speaker 2:Yes, this is where things get really fascinating because it ties the sugar market directly to the energy market, specifically crude oil.
Speaker 1:How does that work? I mean sugarcane is food.
Speaker 2:It is, but it's unique because the same raw material, sugarcane, can be processed by mills into two very different products. Sugar for consumption or ethanol biofuel.
Speaker 1:And mills can choose which one to make.
Speaker 2:Largely, yes. Especially in Brazil, which has the world's most developed flex fuel system. Mills constantly look at the relative prices of sugar and ethanol and decide which product will give them a better return.
Speaker 1:Okay. So if crude oil prices shoot up.
Speaker 2:Then ethanol, which competes with gasoline Yeah. Becomes much more profitable to produce and sell. So Brazilian mills will divert more of their sugarcane away from making sugar and towards making ethanol.
Speaker 1:Which means less sugar being produced.
Speaker 2:Less sugar supply hitting the global market. And basic economics tells you lower supply generally leads to higher prices. So high oil prices tend to pull sugar prices up with them.
Speaker 1:Is that connection strong? Like statistically?
Speaker 2:It's remarkably strong actually. Looking back over the last couple of decades, the data shows a pretty high positive correlation between Brent crude oil prices and world sugar prices. Something like plus point seven zero on a monthly basis.
Speaker 1:Positive point seven zero, that's quite high. So they really do move together a lot of the time.
Speaker 2:They often do. It means that when crude jumps, sugar often follows, largely because of that ethanol diversion mechanism in Brazil.
Speaker 1:But I guess it's not a perfect one to one relationship, weather must mess with that sometimes.
Speaker 2:Oh absolutely, you're right, point seven zeros and one point zero zero weather shocks or other specific sugar market factors can definitely cause them to diverge, but the oil price sets a really important baseline incentive for the world's biggest exporter.
Speaker 1:Can you give an example of when this linkage really played out?
Speaker 2:The twenty twenty oil crash is maybe the clearest recent example. Remember April 2020, the pandemic hit, lockdown started.
Speaker 1:And oil prices just fell off a cliff, demand vanished.
Speaker 2:Exactly. Energy demand evaporated. In Brazil, ethanol sales just plummeted because people weren't driving. So suddenly ethanol was deeply unprofitable compared to sugar.
Speaker 1:So the mills
Speaker 2:They pivoted almost overnight, maximized sugar production, dumped as much sugar as they possibly could onto the market because ethanol was a losing proposition.
Speaker 1:And that flood of unexpected sugar.
Speaker 2:It was a major factor in pushing global raw sugar futures down to around 9¢ a pound, which is I think a thirteen year low at the time. A crisis in the oil market directly triggered a crash in the sugar market.
Speaker 1:Wow. And you mentioned India is also strengthening this link now.
Speaker 2:Yes. But through policy, characteristically. India has this very ambitious program to blend ethanol into its gasoline supply. They actually hit their E20 target, that's 20% ethanol blend, ahead of schedule.
Speaker 1:So the government is essentially guaranteeing demand for ethanol?
Speaker 2:That's right. This policy creates a huge, reliable domestic market for ethanol, which means a significant chunk of India's sugarcane crop is now permanently diverted away from sugar production each year. We're talking maybe four to 5,000,000 tons of sugar equivalent.
Speaker 1:So that policy is effectively removing millions of tons of sugar from the potential global supply every single year.
Speaker 2:Correct. It acts as a kind of structural tightening of the world market, providing ongoing support for global sugar prices. It puts a bit of a floor under the market that wasn't there before.
Speaker 1:Okay. So currency and oil are setting relative values, maybe a ceiling. India's policy a bit of a floor. But what about the actual cost of growing the stuff? Has that changed?
Speaker 2:Dramatically. This brings us to the third lever, the rising cost curve. Driven largely by inflation and farm inputs, this has created a fundamentally higher price floor for sugar globally.
Speaker 1:You mean things like fertilizer, fuel for tractors, seeds?
Speaker 2:Exactly. Fertilizer is the big one. Think back to the twenty twenty one-twenty twenty two period. We saw what analysts called the fertilizer shock. Global fertilizer prices just exploded.
Speaker 2:They went up something like 230% compared to 2020 levels.
Speaker 1:230%? That's insane for farmers.
Speaker 2:It was. And Brazil, which imports a huge amount of its fertilizer, felt this acutely. Their sugarcane production costs reportedly jumped by almost 50% in just one year, 2022.
Speaker 1:So it costs 50% more to grow the cane?
Speaker 2:Then the price the farmer needs to receive just to break even goes way up. The world's sugar price basically had to adjust upwards to reflect this new reality. It established a new higher structural range, maybe around the 18 to 20¢ per pound mark, simply to keep production viable, particularly in key exporting regions like Brazil.
Speaker 1:Production just wouldn't happen below that cost floor.
Speaker 2:It becomes uneconomic. Farmers won't plant or invest if the expected price doesn't cover their massively increased costs.
Speaker 1:Did India feel that fertilizer spiked the same way given their policy focus?
Speaker 2:Good question. And no, not really. This is another key difference. The Indian government massively increased its subsidies on fertilizer during that period.
Speaker 1:So they shielded their farmers?
Speaker 2:Largely. Yes. They absorbed a huge chunk of that global price shock through the government budget. So Indian farmers didn't face the same direct cost pressure as their Brazilian counterparts. This again shows how policy can create very different realities in major producing countries, even when facing the same global shock.
Speaker 1:Okay, costs are up, setting a higher floor, what about getting the sugar from, say, Brazil to the rest of the world? Logistics, that seems like it could add friction.
Speaker 2:Huge friction. And it's often underestimated. Ocean freight is a critical piece of the final landed price of sugar. And when logistics get disrupted, it basically acts like a sudden tax on distance. Think about what happened in 2023 and into 2024.
Speaker 2:We had two major shipping choke points flare up almost simultaneously.
Speaker 1:You mean the Red Sea,
Speaker 2:the attacks in the Red Sea. Exactly. That forced container ships and bulk carriers carrying goods like sugar to divert all the way around Africa instead of using the Suez Canal That adds what seven to ten days to the voyage plus massive insurance premiums for war risk.
Speaker 1:Okay, that's one. What was the other?
Speaker 2:The Panama Canal. Severe drought drastically lowered the water levels forcing the canal authority to slash the number of ships that could transit each day cuts of up to 50% at times.
Speaker 1:So fewer ships getting through, longer roads for others.
Speaker 2:Means dry bulk freight rates spiked globally. Getting sugar from point A to point B suddenly became much more expensive and took longer.
Speaker 1:How does that impact the sugar price itself?
Speaker 2:Well, it directly increases the landed costs for importers. Sugar from distant suppliers, like Brazil shipping to Asia, becomes less competitive compared to more regional suppliers. It also just generally adds cost and uncertainty into the system, which tends to support global price benchmarks. These bottlenecks acted as a real world inflationary pressure on Sugar.
Speaker 1:Makes sense. Okay, final factor. You mentioned weather, but specifically the psychology around weather, not just the actual drought, but the fear
Speaker 2:of drought. Precisely. The sugar market is incredibly sensitive to weather forecasts. Predictions about El Nino causing droughts in Asia or La Nina bringing too much rain to Brazil, the market reacts instantly to these forecasts.
Speaker 1:So it prices in the potential impact long before the harvest is actually affected?
Speaker 2:Often, yes. It creates what traders call a weather premium. The price rises not because supply is tight, but because the market expects it to become tight based on the forecast.
Speaker 1:And I imagine speculators like hedge funds jump on these forecasts.
Speaker 2:Absolutely. They amplify the move. When forecasts turn bullish, say, predicting widespread drought, you often see large speculative funds pile into long positions, betting that prices will go higher.
Speaker 1:Got an example of that.
Speaker 2:'43 again. There were significant fears about El Nino hitting production across Asia and potentially Brazil. This drove a wave of speculative buying. Funds built up huge long positions, pushing raw sugar futures up to that twelve year high near $0.28 a pound.
Speaker 1:They were betting heavily on a weather disaster.
Speaker 2:They were. But then what happened? The rains in Brazil, particularly in the key Center South region, turned out to be surprisingly good. Better than feared.
Speaker 1:So the weather premium needed to come out?
Speaker 2:Exactly. The sentiment flipped completely. Those funds that were betting on higher prices all tried to sell and get out of their positions at the same time. It's called liquidation. And that rush for the exits turned what might have been a gentle decline into a really sharp price fall.
Speaker 2:The unwinding of the speculative bets amplified the price move downwards.
Speaker 1:So the fear and then the relief from that fear became the main price driver, not just the actual rain.
Speaker 2:In that period, absolutely. And it happens on shorter time scales too. We saw it late in 2024, just a forecast for a few weeks of unusually heavy rain in Brazil, which might delay the harvest and crushing.
Speaker 1:Just delay it, not destroy the crop.
Speaker 2:Right, just impact the timing of when the sugar becomes available. Even that prompted a noticeable short term spike in prices. It shows how sensitive the market is not just to the total volume of supply but also to when that supply is expected to hit the market.
Speaker 1:Okay, so pulling all these threads together, it's quite a complex picture.
Speaker 2:It really is. So just to recap the main levers we've discussed, you've got the Brazilian real acting almost like the primary price setter, usually moving inversely to global prices. You have the oil ethanol link, especially in Brazil, acting as a crucial supply swing factor.
Speaker 1:Right, deciding if cane becomes food or fuel.
Speaker 2:Then there's the rising cost of production, particularly fertilizer, which has pushed up the whole structural price floor for sugar globally.
Speaker 1:Making cheap sugar may be a thing of the past.
Speaker 2:Potentially, yes. And finally, you have these logistical bottlenecks and weather forecast reactions often amplified by speculators that inject a huge amount of volatility on top of everything else.
Speaker 1:So if you're trying to understand or even anticipate where sugar prices might go next, what's the key takeaway for you know the informed analyst or investor listening to this? How do they synthesize all that?
Speaker 2:Well I think the biggest shift in thinking is to stop viewing sugar purely through an agricultural lens. You have to see it as a macro sensitive commodity.
Speaker 1:Like oil or copy almost?
Speaker 2:In some ways, yes. You need a dashboard approach. You're watching the weather. Yes. And crop reports, obviously.
Speaker 2:But you also need to be tracking the Brazilian reals exchange rate against the dollar very closely. That's almost your lead indicator.
Speaker 1:Because of that inverse relationship.
Speaker 2:Exactly. And you need to be watching energy prices, specifically Brent crude because of the ethanol connection and that positive correlation we talked about remember around plus 0.48 or even higher historically though we mentioned 0.7 earlier as a possibility too depending on the timeframe. The exact number isn't as important as the strong positive link.
Speaker 1:They
Speaker 2:are absolutely integral parts of the puzzle now. Monitoring the likely direction of the Brazilian currency and where oil prices are heading can arguably tell you as much or sometimes more about the potential next big move in sugar futures than just looking at the rainfall in Sao Paulo State.
Speaker 1:Fascinating. It really drives home that sugar isn't simple anymore. It's tangled up in finance, energy policy, geopolitics.
Speaker 2:It truly is. It's become a full blown global macro asset.
Speaker 1:Definitely something to think about next time you're stirring your coffee or checking those futures markets. Thanks for walking us through that.
Speaker 2:My pleasure.