Following their record sugar production in 2018/19 of 33 million tonnes India has seen their production crash due to probably little over their internal consumption (26.5 million tonnes) due to very dry weather followed by an exceptional wet monsoon which caused flooding in key production regions.

Thailand has also seen their production collapse from their records production in 2018/19 of 14.5 million tonnes to an estimated 9.6 million tones due to many of the cane regions suffering the worst drought in 40 years.

The US has had major issues with their beet crop due to very wet and cold weather. Mexico and the EU have produced less refined sugar with the latter seeing production drop for the second year running after their record production in the season after deregulation due to lower planted area and adverse weather.

So it would seem the optimism that saw prices rally to their highest level since April 2017 in February was justified despite large global stocks and muted consumption growth. The stocks were concentrated in India and Thailand where production was dropping. With analysts seeing a global production deficit of well over 7 million tonnes for 2019/20 these stocks were expected to soon disappear. Furthermore, another production deficit was being forecast for 2020/21. So no one was too surprised when prices rallied to just shy of 15 cents in the middle of February. The funds had turned their short position which they had held for over fifteen months to long but had ammunition to buy considerably more. While traders were trying to be realistic with their expectations after so long a period of poor prices there was a genuine view that prices could improve further.

Then the Coronavirus reared its ugly head. Initially, the markets took a ‘risk off’ view with stock markets and energy values dropping. The US dollar strengthened which saw the Brazilian Real drop to its weakest level ever making sugar production suddenly a much more viable option for Brazilian millers. However, over the past few days, the markets have taken a much more pessimistic view culminating with crude collapsing over 30% in just one day after a breakdown of talks between OPEC and Russia which prompted Saudi Arabia to launch a price war. The world stock markets have recorded huge losses with the S&P 500 down at one point over 18% from its all-time high of February. Sugar prices have followed dropping over 16 % recently. The funds are rapidly liquidating their recently acquired longs as they look to square their positions. Physical traders are, understandably, nervous and cutting their exposure to the market.


The Coronavirus maybe receding in China but that is not the case for the rest of the world and ‘peak’ Corona maybe many weeks away. However, the fundamental picture for sugar is unlikely to change too much. A large deficit will be seen this 2019/20 season. Only last week the International Sugar Organisation increased their prediction for the deficit to 9.4 million tonnes. The bulk of the stocks are likely to be shipped and consumed leaving the market vulnerable to any unknown problems for next season.

Some argued before the macro went into meltdown that sugar traders got too excited too quickly pointing to Brazil’s ability to swiftly switch from ethanol to sugar production and the fact that Indian production is expected to bounce back to above 30 million tonnes in 2020/21. These fears are valid. The Brazilian Real has plunged around 20% since the middle of last year meaning ethanol parity has dropped considerable. The collapse in crude prices has not helped the situation. The mills were noted sellers when prices hit their highs in February. The Indian government still ‘supports’ their cane industry which means farmers will continue to see sugar cane production attractive.

Whatever the future holds some might take the view that the recent collapse in sugar prices may turn out to be a short term reaction to the catastrophic macro picture and the fundamentals will eventually shine through. However, it is a salient lesson to traders to assume nothing and question everything.

Howard Jenkins E: T: +44(0) 20 7716 8598

7 | ADMISI - The Ghost In The Machine | Q1 Edition

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