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Sugar Party Over!

For last two years we have seen a bull market in comodities market. Sugar companies have enjoyed double digit profit growth on the back of increase in the global sugar prices. Commodities market follow a cyclical demand, where prices first go up and then the companies start investing in new facilities resulting in more supply and eventualy the prices start falling. So it could be concluded that the commodity cycle depends on the ability of companies to put up new production facilities. Refer the COPPER Article for more informaion.

The Sugar prices are falling for some time now and analysts believe that there is excess supply created in the market which will push prices down further. The prices of Sugar on London futures have fallen from a high of $490 per tonne to $384.9 on 20th August. Since August is usually depressed period for sugar prices becuase of the full swing of harvest in the centre-south Brazil(largest producer of Sugar) and Northeast Brazil harvest about to get in full gear. This means that the prices could fall by another 10% next month.

Another big factor is increase in production form Russia to Thailand. Russia which is the largest importer of raw sugar is harvesting a larger than expected big beet crop. And Ukraine is also expecting a larger crop this year compared to last year. Plantations arround the world have increased their sugar plantings to take advantage of the Sugar bull market. The supplies from these new plantations would hit the market soon at pull the sugar prices down.

In China the use of alternative sweetners is picking up. They have been using sweatner made from corn for a while and now they are testing sweatner from rice which is also in abundance in China. Another dampner for the demand of Sugar could be crude oil prices. In Brazil they are using their Sugar Cane crop to produce Ethanol as a substitute for gasoline (petrol). They prefer production of Ethanol over import of more expensive crude oil. All this could change in case the crude oil prices fall to levels where profitability on production of Ethanol would fall and a shift towards production of Sugar would take place.

Anyways it is very clear that the Sugar market is facing huge surplus due to higher productions. Some forecasts put ther figure between 3.1 million tonnes to 3.3 million tonnes, but some traders feel that the surplus would be even bigger.