The Strategist

The world expects the largest excess of sugar in history

07/13/2018 - 11:32

Excess of sugar in the market in 2018 will lead to world reserves reaching a record level amid a slowdown in demand and an upsurge in production, ZeroHedge writes.

Having reached a high of 15.37 per pound on the third day of January, the price of sugar futures, which are traded on the Intercontinental Exchange, was on the way to a decline.

Sugar was trapped in a long-term "bearish" market, since the natural phenomenon of El Niño caused a global deficit in 2016, when prices jumped to 23.90. Now futures are trading near 11.2.

According to the report of the Food and Agriculture Organization of the United Nations (FAO), world sugar production is expected to reach a record high level, outstripping global demand. Meanwhile, "trade wars" are strengthening short-term price volatility.

The decline in sugar production in Australia and Brazil was offset by a significant increase in China, the European Union, India and Thailand, the report said. This creates the largest global excess of sugar in modern history, as production is expected to outpace global consumption "by a large margin."

Although the "bearish" phase in the sugar market has been persisting for several years, rising world prices for crude oil can support prices for sugar, as it can be used to produce ethanol for biofuels, and not as an ingredient for food.

Historically, sugar prices are unsustainable due to weather trends. "If there are no problems with the weather, it does not look like the bulls have a hope for a sustainable rally," said Donald Selkin, Newbridge Securities Corp's chief market strategist in New York, to Bloomberg.

As the agency notes, the latest data from the Commodity Futures Trading Commission (CFTC) of the United States show that asset managers more than tripled their net short positions. This indicates the expectations of the next round of price cuts.

Nevertheless, there is still a hope for the "bulls". It is El Niño, a fluctuation in the temperature of the surface layer of water in the equatorial part of the Pacific Ocean, which has a significant effect on the climate. Arid conditions can damage sugar crops in the south-central part of Brazil, the world's largest production region. The potential for the occurrence of El Niño later this year may also mean some damage to the harvest in Asia.

"Due to weak attempts to develop El Niño over the next 3-6 months, we need to control the nature of the precipitation in the main Asian regions of sugar production, including India, China, Thailand and Indonesia. As a rule, when El Niño is established, this leads to subnormal rainfall in South and Eastern Asia. If this happens, the growth conditions will be less favorable than what we see now in this region," said Ed Valle, a meteorologist who works with institutional traders.