No sugar high in sight

Sugar prices have halved in value since mid-2011 as bumper harvests outpaced demand growth. Now sugar prices are currently trading near six-month lows, just below 16 cents per lb on the expectation that Brazilian farmers will again have a bumper crop with farmers reportedly harvesting their crop at a blistering pace. Brazil is the largest sugar producer, accounting for just over 20% of global production and almost 60% of global sugar trade flows.

Sugar cubes.jpg
Sugar cubes” by Uwe Hermann Licensed under CC BY-SA 3.0 via Wikimedia Commons.

According to Unica, mills in Brazil’s center-south region, which process 90% of the country’s cane have harvested 13% more sugar between April and mid-July than the same period in 2013. However, according to the investment bank Macquarie one reason for the rapid harvest is the dry weather following the drought that affected much of Brazil earlier in the year has enabled farmers to transport their cane from the fields much faster.

While the effects of the drought have inflated early crop indications by making it easier to harvest, there is also a suspicion that the drought also badly damaged the Brazilian crop with many forecasters predicting a lower harvest this year. Sugar output from other producers may also disappoint. India, the second largest producer (17%) has seen less rain than usual since the monsoon season began in June, although this may still be enough to cover domestic consumption.

However there are a number of factors, both and short and long term which might limit any potential upswing in prices, should the lingering effects of the drought reveal themselves in a poor crop.

First, Brazilian sugar farmers are suffering as current low prices are well below their cost of production. Although Brazil used to have the lowest sugar production costs in the world, levels have risen steadily over the past few years and now range between about 20 cents and 24 cents per pound, depending on the age and size of the mills. In addition farmers suffer from over-capacity, lack of storage and logistics and (unlike other producers supported by subsidies) unsupportive government policy. The mounting debt that has resulted has forced many mills to close but is also proving a bottleneck to restructuring, with many local banks owning the debt. All of which means that it may take some time for there to be a supply response to low prices.

Second, the Brazilian government has capped fuel prices in a bid to control inflation (up to 6.5% in August from below 4% back in 2007), but which also squeezed ethanol margins. To recap, sucrose extracted from sugar cane can be manufactured into either raw sugar or ethanol. In Brazil, typically 48% goes into making ethanol and 52% goes into producing raw sugar, which is then processed into refined sugar. According to sugar and ethanol cooperative Copersucar, ethanol demand in Brazil could increase by 8 billion litres to over 30 billion litres a year if the government were to allow state-owned oil major Petrobras to sell gasoline at market prices.

Third, high stock levels. According to Commerzbank high stocks thanks to previous years’ surpluses “should continue to prevent major price jumps.” The bank suspects that even if world production for 2014-15 falls 2-3 million tonnes short of consumption, as forecast by many observers, that this ” would not lead to a genuine scarcity” of supplies, after four successive seasons of production surplus.”

Related article: Excess sugar consumption leaves a bitter aftertaste


Resource nationalism risk seen down as ‘shale boom’ changes perception of scarcity

Some interesting comments from Antoine Halff, from the International Energy Agency (IEA) on how the shale boom in the US has changed oil-producing nations perceptions of scarcity and their ability to negotiate (read impose) better terms for them with oil companies.

In an interview with Bloomberg he said “Back in 2008, we were at the peak of a cycle of resource nationalism among producing countries. Now we’re in a completely different situation, where some of the very same countries that had indulged in resource nationalism are back-pedaling, and making their investment terms more attractive to foreign companies,” Going on to say “Many countries feel threatened by the unconventional revolution in the U.S. There’s competition for investment, competition for technology.”

This view contrasts with those expressed by Dambisa Moyo (author of Winner take all: China’s race for resources and what it means for the world) who believes that the slowing growth in some emerging markets will be one of the main drivers of government action towards resource nationalism, fearing that “…we will continue to see much more talk and much more action around natural resources in the years to come.”

And despite the apparent correlation between resource disputes and crude prices depicted in the chart below Jaakko Kooroshy from Chatham House believes that “…conflicts with governments will not disappear because prices have fallen. Governments will continue to look to get a good deal, and where they feel they’re not getting that…they may act on this.”


What risk does Ebola represent to commodity markets?

With fatalities from the Ebola outbreak at least 932 now the US Centers for Disease Control and Prevention (CDC) on Wednesday issued its highest alert for an all-hands on deck response to the Ebola crisis in West Africa. This is the first time since 2009 that the Level 1 alert had been issued, at the time it was in response to the outbreak of H1N1 flu. After spreading through many West African countries today brought the news of the first person to die in Nigeria as well as a number of people infected (see reports).

The West African region is host to a number of key commodity exporters. Ivory Coast and Ghana being the two largest cocoa exporters and Nigeria a significant OPEC oil producer and exporter. Other exports from the region include a range of agricultural commodities (mango, pineapple, groundnuts, cotton etc.) and to a far lesser extent metals (copper, gold) and diamonds.

Most mining companies in the worst affected areas (Guinea, Sierra Leone and Liberia) report that mine, port and rail operations are unaffected so far, although various precautions have been taken, including frequent medical checks, the imposition of travel restrictions and the evacuation of non-essential staff. Mineral exports, including iron ore and diamonds, are increasingly likely to face disruption if mining companies place local workers on leave. Given the regions relatively small proportion of overall supply of metals and minerals even sustained disruption is unlikely to have a significant effect on prices.

An outbreak in Nigeria could have implications for its oil and gas sector. However, like the small scale oil operations in other countries in the region that are infected the energy industry in Nigeria is likely to be largely insulated from any outbreak. Foreign oil companies will evacuate non essential personnel but given the relatively low labour intensity of the industry and the large off-shore production off the coast of Nigeria, the impact on production and exports is likely to be minimal.

Perhaps the biggest concern from a commodity supply point of view is cocoa production and exports. Although only a small supplier (estimated at 10,000 tonnes) the Ebola outbreak is forcing farmers and their families to flee cocoa plantations in Sierra Leone. Already international buyers of cocoa have refused to visit the producing regions to buy seed. What if a similar outbreak occurred in the Ivory Coast, the largest cocoa producer in the world with an output of 1.6 million tonnes? Already cocoa prices have risen by 19% this year due to strong demand and poor weather adversely affecting supply.

Perhaps the biggest potential impact on commodity prices is for a demand side impact. So far the only impact has been the negative impact on the worst affected economies and the cancellation of a number of airline carriers’ routes to affected regions. The bigger worry is the affect that a wider outbreak could have on confidence, particularly in air travel and the knock on effect this could have on demand for oil.