Sugar rush

Brazilian sugar producers enjoy a bumper 2020 but will it last?

It was a very good year for Brazilian sugar producers, who increased production by more than 44% and exports by more than 70%, swinging global supply into a small surplus.

A 20% depreciation of the Brazilian real against the US dollar helped to boost exports generally. In terms of sugar, the higher export price made sugar export more attractive than an uncertain ethanol market. Producers switched to higher sucrose levels and sought to maximise sugar production.

A Brazilian US-based commodities trader gave us his view, “When you look at the sugar sector in Brazil, you have to compare the sugar price vs the price of ethanol. Right now, the sugar prices are outpacing ethanol which means producers switch from ethanol to sugar, leaving the ethanol supply market tight.”

“When you look at the sugar sector in Brazil, you have to compare the sugar price vs the price of ethanol.”

Commodities trader, USA

The trader notes that not every producer will have been a winner last year, “Not everybody will have been able to capitalise on the higher price. 50% of the market is sold ahead so some producers would have sold before the recent price rise. The bigger picture is, that despite COVID-19, the demand for sugar remained steady, it didn’t fall. Its demand is inelastic, it doesn’t change much.”

In 2020, however, the inelasticity was a challenge. Global sugar demand usually increases by about 2% per year (base demand growth) with per capita growth industrialisation / urbanisation. Last year was the first time a lack of demand growth had been seen for 40 – 50 years. A sugar producer explained, “People didn’t go out much in 2020, there was no entertainment which means lower drinks sales and lower sugar sales. This was offset to some extent by higher sales of sugar for baking but overall demand was flat.”

Looking forward the commodities trader believes that supply shocks and speculative behaviour could see commodities like sugar continue to rise, “The speculative sector is simply buying commodities as an inflationary hedge, so with dollar weakness, you have people going into commodities as a hedge against that. I see institutional investors buying bitcoin, soybean and corn not specifically because they expect demand to rise but more like, ‘Is it a commodity? Yes, ok let’s add some exposure to that.’ Prices are getting ahead of themselves.”

“The speculative sector is simply buying commodities as an inflationary hedge […] Prices are getting ahead of themselves.”

Commodities trader, USA

Finally, will growing awareness about the health effects of increased sugar consumption alter market demand? The trader doesn’t think so, “Sugar producers and lobbyists will get around the stigma and the people who care, today, are a small portion of the market. The biggest driver of consumption remains an increase in people’s incomes.”

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