Price movement recap
For this first bulletin, and in view of the current situation in the world, we will focus on the consequences of Covid-19 on the sugar market. The first graph shows the evolution of the sugar price for the year 2020.
Like many other commodities, sugar is highly volatile. At the beginning of the year, prices have been rising steadily. Sugar prices reached a peak in February. However, in the months that followed (until almost the end of May), prices fell steadily. We can notice that this drop happened because of the worldwide lockdown period. Then, from the end of May until now, we can see that prices have a tendency to increase, although they have not yet reached the initial price before Covid-19 – more than 0.15 before the virus compared to 0.14 nowadays.
Sugar prices in USD/pound
Available on: https://www.fxempire.com/commodities/sugar
Supply and demand dynamic
As we can see in the graph below, consumption and production are almost equal, while the indicator price tends to decrease.
Demand and supply are impacted by the COVID-19 pandemic but in very different ways. The importance of the virus today is slowing the growth in demand for sugar (quarantine, closing of restaurants/bars,…). On the other hand, the supply for sugar is increasing. This increase has two main causes:
– due to the fall in the price of oil. Indeed, the price of ethanol is set according to the price of oil. If the price of oil falls, then the price of ethanol also falls (and vice versa). Since the beginning of the pandemic, the price of oil has been falling, which has lowered the price of ethanol. As a result, sugar producers are now focusing mainly on sugar production because ethanol production is uncompetitive
– due to the reduced demand for ethanol. Indeed, during the quarantine period put in place because of the significant spread of COVID-19 , fuel consumption has decreased sharply.
Furthermore, the falling prices can be explained by the forecast of export which is going to be mainly from India. Indeed, India has accumulated lots of sugar stocks during the pandemic because of the lockdown.
Available on:https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/sugar
Recommendations
Since we are in a backwardation position it is preferable to adopt a short position. Indeed, prices are falling down. As we are entering the second COVID-19 wave, the sugar market is facing lots of uncertainty, but we can predict that sugar consumption is probably going to continue to fall down and prices even.
References
2020 – Agricultural Commodities vol.10 no.2, June quarter.pdf, [no date]. [online]. [Viewed 28 October 2020]. Available from: https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1030381/10
Agricultural Commodities vol.10 no.2, June quarter 2020, 2020. . Vol. 10, p. 4.
Global sugar production continues despite COVID-19 – London Consulting Group, [no date]. [online]. [Viewed 29 October 2020]. Available from: https://www.londoncg.com/covid19/industries/agricultural-business-aquaculture-fishing/sugar-mills/global-sugar-production-continues-despite-covid-19/
SPYROSOFT, 2020. The Energy Series: The Brazilian Ethanol Market -. [online]. 7 September 2020. [Viewed 29 October 2020]. Available from: https://www.czarnikow.com/service/market_analysis/the-energy-series-the-brazilian-ethanol-market
Sugar | OECD-FAO Agricultural Outlook 2020-2029 | OECD iLibrary, [no date]. [online]. [Viewed 28 October 2020]. Available from: https://www.oecd-ilibrary.org/sites/3736a600-en/index.html?itemId=/content/component/3736a600-en#back-endnotea5z2
Sugar Price | FX Empire, [no date]. [online]. [Viewed 28 October 2020]. Available from: https://www.fxempire.com/commodities/sugar