Sugar is ending 2018 on a bitter note on signs that a price collapse could get even worse next year.
Futures have slumped 17 per cent this year, a second straight annual loss, as booming global production sparked a supply glut. The one thing that kept the rout from being even deeper: robust demand for ethanol in Brazil, the world’s biggest sugar grower and exporter. But now that backstop looks like it’s going away.
Cane millers can turn crops into either sweetener or biofuel. For a lot of 2018, high gasoline prices meant Brazilian processors favored making ethanol, helping to cap the sugar glut. The recent plunge for crude oil is signaling that trend is about to reverse.
Most drivers in Brazil own flex-fuel cars that can run on either gasoline or ethanol. Traditionally, consumers choose the alternative fuel when it’s below 70 per cent of the price of gasoline because it yields less energy per liter. Now that crude oil is tumbling, the outlook for traditional fuel consumption is improving, and ethanol prices are slumping as a result.
In 2019, cane millers stand to make as much as 13 per cent more by turning the crop into sweetener instead of biofuel, according to data from consulting firm FGA, based in Ribeirao Preto, Sao Paulo state. That compares with a sugar discount of as much as 30 per cent this year.
At projected levels for premiums, prices will likely be attractive enough to spur millers to produce an additional 2 million tonnes (mt) of sugar in the 2019-20 season that starts in April, Willian Hernandes, a partner at FGA, said in a telephone interview. His forecast is for producers in Brazil's Center-South, the top region for output. Meanwhile, Marex Spectron sees the Center-South producing 28.8 mt in the coming season, a jump of 2.3 mt. The maximum potential for additional output would be 10 mt.
The outlook for bigger Brazil production will likely continue sugar's slump from this year. Futures touched a 10-year low of 9.91 cents a pound in August amid the outlook for a record surplus supported by bumper crops from the European Union to Thailand. The market saw a brief respite amid questions over the size of India's exports and as ethanol demand boomed in Brazil. Then oil started its decline, cutting the outlook for biofuel and dragging sugar down with it.
Investors are betting on more declines. Hedge funds held a sugar net-short position of 5,810 futures and options as of December 11, according to US Commodity Futures Trading Commission data published Friday. The holding, which measures the difference between bets on a price increase and wagers on a decline, has been negative for three straight weeks.
There are still looming questions for sugar in 2019. Currency fluctuations could spark volatility as declines for Brazil’s real make exporters more eager to sell shipments that are priced in dollars.
And even bulls have a few reasons to not completely give up hope. Sugar output in India, the second-biggest producer, could end up being hurt as yields in some areas are looking like they will shrink, Dev Gill, head of sugar & grain options at Marex Spectron in London, said by email. In the European Union, low sugar prices may trigger beet farmers to shift plantings to more profitable wheat crops.
But there’s one area of consensus among analysts and traders: crude oil will drag sugar wherever it goes, up or down.
“We could be in for a long period of uncertainty as we await for the start of Brazil’s crop in 2019,” Michael McDougall, senior vice president at ED&F Man Capital Markets in New York, said in report on December 12.