Drought Causes Sugar Prices to Soar

Americans eat too much of it. It’s in nearly everything we consume — from cake to coffee, from breakfast through dinner and even those little in-between meals. In fact, health groups in Great Britain are trying to create a special tax for it.

There are ample stockpiles of it and yet concerns are growing about upcoming scarcity. As a result, this commodity’s price is fluctuating and volatility is increasing.

The commodity is sugar, and a combination of dry weather and increasing demand may create the first shortage in five years.

Most of us think of sugar as the sweet confection we sprinkle on oatmeal or cereal, the stuff we dump half a cup of into a baking mix or blend with the morning coffee. The four-pound bag we blindly grab at the store is filled with either beet sugar or cane sugar. It’s a basic staple of life that we take for granted.

However, sugar is also used to make ethanol. In fact, much of Brazil’s sugar crop is used in ethanol production with just 45% of this year’s crop expected to be crushed into sweetener.

The weather has been great for four years and sugar production has met demand. This year, the demand for sugar will increase 250,000 tons.

But Brazil’s production is expected to fall by 22 million tons while another large sugar cane producer, India, is facing a smaller harvest, too.

Brazil is the world’s top sugar producer and El Niño is ravaging the country. Rainfall has been half of normal since early 2013 and the lack of moisture is taking its toll on sugar cane growing regions of the south-central part of the country, where 90% of Brazil’s sugar is grown.

You probably heard amongst the World Cup coverage about the flooding last week that forced the evacuation of 50,000 people in the states of Santa Catarina and Rio Grande du Sol. The rain fell far away from the sugar cane areas of south-central Brazil.

If the weather is so bad, why aren’t sugar prices skyrocketing?

We’re not feeling the impact of the drought yet because the dry weather allowed this year’s harvest to speed ahead faster than normal. The sugar pouring into production facilities right now is temporarily suppressing the price. Sugar crushing is up 16% from last year.

Soon, the good cane will be harvested and farmers will begin to work through the drought-ravaged fields. Yields will fall significantly at that point, and futures traders will become nervous as they watch crushing activity slow and supplies dwindle.

It also doesn’t help matters that there are some indications that Brazil’s government might decide to turn more sugar cane into ethanol, making less raw sugar available for export, also helping to drive prices higher.

Sugar will soon face another weather woe: too much rain. El Niño almost always brings flooding rain to Brazil midway through its cycle. These torrents of rain will begin in August and continue through April. Unfortunately, it winds up being too much of a good thing and damages the crop, especially at harvest, which happens to begin in April.

Of course, Brazil is not the only player when it comes to the price of sugar.

India is the second largest producer of sugar in the world — behind only Brazil — and India’s monsoon is failing. India relies on the monsoon for the bulk of its annual rainfall, so a failed — or very weak — monsoon this year will have an impact lasting well into next year. The country has stockpiled the commodity and can handle a crop failure for a little while, but dry weather will gradually reduce exports, helping to drive the price of sugar higher.

Few traders truly recognize the extent of India’s problems because short-range forecasts keep predicting the monsoon will come. It has not and much of the country is experiencing rainfall that’s only 20% to 50% of normal. Traders will realize the problem late this year and prices will rise.

Sweet Profits Ahead from Sugar

I expect the turning point in sugar supplies will be reached in August.

As worldwide sugar consumption continues to increase, we are sure to feel the pressure of both Brazil’s and India’s sugar shortfall. Just when farmers and traders think south-central Brazil’s drought is over, torrential rain will damage the crop. Meanwhile, India’s dry weather will most likely affect next year’s crop.

That means we will likely see sugar prices soar for at least the next 12 months. I will be keeping Weather Trader subscribers updated on the best ways to take advantage of price shifts in sugar and other commodities affected by El Niño.

There’s a silver lining in every cloud,

Chris Orr,
Editor, Weather Trader

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