What happens to the demand for sugar?
If you look at the raw sugar futures, you’d be forgiven for thinking there wasn’t much going on. We are stuck in a boring side area. It is the same for refined sugar futures, the demand for sugar is not reflected in the supply.
This in itself is surprising as raw sugar has recently formed a parabolic advance. Sugar has spent more than a year in a sideways range between 17c and 20c. The fatigue was broken in November 2022 and you can see the point where speculators came back to buy the market. After months of shock around, we had 12 consecutive sessions of sugar price rises that took us from the bottom of the range to the top. The specs rebuilt their long at 18-20c and this has been extremely profitable for them but they just started moving. They were not responsible for what happened next.
At the end of February, the sugar industry met face-to-face in Dubai for the sugar conference. This was the first opportunity in a few months for everyone to meet and compare notes. It came as a bit of a shock to the sugar trading houses to find out how bullish they were. Meanwhile, producers around the world reported bad news. Brazilian producers said that a large cane harvest was coming but the risk of poor inland logistics would limit supply. Northern Hemisphere producers in India, Thailand, Mexico, Pakistan and China indicated that harvests could be below expectations.
By the time everyone met again in Geneva in April, this bullish sentiment had expanded further. There is no such thing as a prize for driving emotions. People talked about the risk of El Niño. Bad fears about the harvest in the northern hemisphere had come true. Trading was extremely bullish – some were talking 30c, others 40c. They seemed to want to pressure consumers to buy. It worked. Consumers had not adapted from the bear market of the 2010s, where buying late was rewarded. Now they needed to buy early, but they would not have done so and would have been left in the first quarter of 2023. They panicked during April and May, running a faster and higher rally and leaving a parabola on the charts.
The problem with this is that when the panic buy is over, who buys the next one? Speculators, trading houses and consumers have now all bought. Producer hedges seem to be ok – their mark to market is deeply negative, which is painful for finance providers who marginalize hedges, but no one has had to buy back yet. In the short term, the answer was Chinese refiners, who bought around half a million tons of raw materials within the quota when the price fell below 25c. But they will not buy their 3.5 million tons of quota sugar at this price, the margins are far too negative.
Usually, when a parabola breaks, the only way is to go down. It is very rare to see a broken parabola resume its upward trend. So sugar’s performance in June has been incredibly robust; we only have an 8 percent discount on the tops.
Compare this with the recent parable of the US dollar. The US dollar is the most liquid asset on the planet. The currency formed a parabolic advance for 15 months in 2021 and 2022, but when this support was broken, the price fell by 15 percent.
Well, the raw sugar piles for 2023 are about to collapse. The July-October spread is about to trade at a discount for the first time since November. The October/March spread is a feast for anyone who likes technical analysis: a double top with head and shoulders too.
The difference between July and March has fallen by 100 points in the last 9 weeks. This spread covers the entire Brazilian season.
The buyers choose to defer demand and take their hedges off the market and earn decent returns by doing so. Of course, you only wash out if you’re willing to give up market share or if the demand you expected doesn’t materialize. We believe it is the latter.
Everyone is fixated on supply, which has been on the rise – especially El Niño. El Niño is unreliable: it does not give you the weather you expect at the time you expect. But people don’t always like to be bothered by facts. And demand analysis is equally important, but no one can do this well.
It is very difficult to model or understand demand destruction and deferral in real time. Even when prices rise, sugar consumption has a complex relationship with price. You can see from this chart that we have gone through periods of high and low consumption growth, but apart from the price madness of the 1970s and 1980s, there has been almost no major reaction to high prices.
Sugar is cheap and pleasant to eat. It is a useful ingredient. When food inflation is high, people can actually eat more sugar and cut back on more expensive foods like meat. If you look at some of the stories that emerge, it doesn’t paint a pretty picture for sugar consumption in some areas.
Sudan is usually a major buyer of refined sugar but is unfortunately gripped by conflict.
In Malaysia, the government has asked sugar refiners to provide daily production updates: this does not happen in a well-supplied and normal market.
In Gabon, sugar seems to be in short supply.
In Kenya, sugar prices rose by 22% in May alone.
The Brazilian physical assets remain quite weak to support all this. Traders holding sugar have to cut prices to find buyers in Brazil. This is not a positive sign. We also don’t seem to have a recipient for the July semesters that expire at the end of June.
It is quite possible that everyone in the market is fixating on the very real and serious problems of the supply side of the sugar market and completely ignoring the equally important but more invisible problems of the demand side.
Put all this together and we still have a cracked parabola for sugar and structural weakness in raw and refined sugar futures curves. On the other hand, we also know that there is a large sugar buyer who is left out.
Chinese refiners still need to use all their out-of-quota import permits this year – 3.5 million tons of them. They will be keen to buy at weak prices. So my best guess is that sugar is trading sideways and will fall in the coming weeks. Chinese refiners will be keen to buy close to 20c, perhaps.
In the longer term, there is no denying the major supply problems facing the sugar market. I’m sure we will see new peaks in the next 6-12 months, perhaps when the end of Brazil’s harvest is known and we can see the full extent of El Niño in the Northern Hemisphere Western Pacific crops. But in the short term, I would take note of the collapsing spreads and tread carefully.
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