What happened to the price of sugar during the 2009-2011 bull market?
The price of sugar is now at a 12-year high of 27 cents per pound, which inevitably raises the question of what happened 12 years ago. What triggered the bull market and what can we learn from it. The 2009/2010 season saw an El Niño, Brazilian logistics problems and a short buyer.
Sugar price surged to 30 cents
In the mid-2000s, the European sugar market was reformed. Production was cut back and subsidized sugar exports ceased. This removed the large supply of low-cost sugar from the market and led to a brief boom in 2006 when the price of sugar rose to 20 cents.
2008/2009 saw the biggest ever decline in global sugar production. World production fell by almost 20 million tons. India’s sugar production fell from 28.5 million tons in 2007/2008 to 14.7 million tons in 2008/2009. Low sugar prices led farmers to replace sugar cane with other crops. A poor monsoon did not help matters. It was clear that India needed to import sugar and that global sugar stocks were beginning to fall.
In mid-2009, an El Niño event was formed. This could lead to dry weather in sugarcane regions in the northern hemisphere, damaging sugarcane development, and wet weather in sugarcane regions in central-southern Brazil, the world’s largest sugarcane region.
The Brazilian sugar cane crush in July, August and September was affected by wet weather, resulting in the world losing 1.5 million tons of sugar production. This sugar was urgently needed in India and elsewhere. As a direct result, the price of raw sugar rose to 30 cents per pound in February 2010.
Soon after, it became clear that El Niño would also affect the northern hemisphere’s cane sugar production. This meant that global stocks of sugar fell sharply as the world consumed more sugar than it produced. Normally, this should have led to a further increase in the price of sugar. This never happened and instead the whole sugar market collapsed.
Sugar price fell to 13 cents
The speculators who just a few days ago bought sugar at the highest price in 30 years completely lost confidence in the sugar market. This was likely triggered by a higher than expected sugarcane area in India.
A selling spiral emerged that drove prices all the way to 13c, exacerbated by algorithmic and trend-following trading systems. The market also expected that the 2010/2011 season could produce a small production surplus globally, partly due to a record Brazilian sugar cane harvest.
The rally to 36 cents
Despite expectations of a small production surplus, global sugar stocks remained dangerously low in 2010. This created a strong demand for physical sugar in the second half of the year, most of which had to come from Brazil.
Ships waiting to dock appeared in the ports of Santos and Paranagua as Brazilian export logistics could not keep up. The delays meant that anyone who needed sugar quickly had to pay premiums to ensure delivery, causing the sugar market to rise. This shocked buyers who had hoped the market would slide down after the rally at the beginning of the year.
As El Niño seemed to fade in, the former short sellers who lacked price coverage drove the sugar market ever higher. This so-called short squeeze continued when the 2010/2011 Brazilian sugar cane harvest also came in poorly.
Aging sugarcane and drought until mid-2010 resulted in low agricultural harvests. About 560 million tons of sugarcane were harvested, down from initial hopes of 590 million tons. In Australia, heavy rains forced growers to leave almost 20 percent of the sugarcane crop in the ground. The EU harvest was disrupted by early winter conditions that left some beets unharvested while the Russian harvest was destroyed by drought and extreme heat during the summer. Sugar production reached only 2.7 million tons, 0.5 million tons less than the previous year despite a 17.5 percent increase in sown area. The price of sugar rose to 36 cents per pound.
What can we learn from 2009-2011?
First, strong commodity markets also tend to be volatile. Sugar stocks and supply around the world are unevenly distributed. The stress of low stocks can lead to cracks in normal supply chains and therefore strange price dynamics. By February 2010, the market had tripled from 10c to 30c in 18 months. Only a crazy analyst would have said it would halve in the next 3 months. Nevertheless, it happened. At one point in the last rally towards 36c, the sugar market fell by 8c in just 2 sessions.
Second, as commodity markets strengthen due to structural supply problems, they need continued high prices to solve these problems. A sharp rally to 30c does nothing. This means that commodity markets can often rally, fade and then rally again, leaving distinct U-shaped patterns on price charts.
Third, the news follows price action, not the other way around. The news looks most bullish at the top. Market models such as trade flow analysis are reactive to events and price. Bull markets are about order flow and sentiment: markets are the result of pressures and in bull markets these pressures are more severe than normal. But when the last distressed short is forced to cover, the rally is over. Newswires and fancy Excel models will not tell you when this has happened.
Today’s bull market
Much of what we saw in 2009-2011 is being repeated today. The sugar market was squeezed as subsidized Indian sugar supplies put pressure on prices in the 2010s. These subsidies were challenged by the WTO and India has diverted sucrose to ethanol production. The parallels with the reform of the European sugar market and the 2009-2011 bull market are clear.
There has also just been the buyers’ short squeeze in the sugar market in April, similar to the one we saw in H2’10. This year’s squeeze was helped by a deficit in Northern Hemisphere cane sugar production in India, Thailand, Mexico, Pakistan and China.
It is also possible that now the short squeeze is over, prices are retreating in the short term, back towards levels where physical buyers – especially Chinese and re-exporting sugar refiners – are willing to secure sugar cargoes.
Keep in mind that even in the longer term we could see a classic U-shape and another price increase, perhaps as we enter 2024. El Nino seems likely, we are dependent on Brazilian sugar supplies this year and there are concerns that its logistics will not be able to cope with the demand for sugar. These are the same conditions that drove the market to 36c in 2010.
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