The Sweet Truth about Buying Sugar as a Commodity Right Now
- Prices are low due to surpluses in the past and lower production costs
- The market hasn't fully recovered despite falling stock levels and a predicted deficit
- The signs points to a modest recovery in 2020
Sugar is such an everyday item that you might never have thought of it as a commodity that you could invest in. Yet, it offers an interesting way of diversifying your investments by choosing something that isn’t directly linked to many other financial instruments or factors.
The Basics of the Price of Sugar
As is typically the case with commodities, it is supply and demand that mainly drives the price of sugar. This leads to a highly volatile market, as prices can vary widely according to a range of factors.
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For example, poor weather can lead to a lack of sugar, while sugar companies might plant more than is needed some years.
India and Brazil are massively important in the sugar market. In 2019, India produced 34,300 x 1000 tonnes to overtake Brazil as the planet’s top producer. Therefore, production issues and exchange rates in these countries are important.
2018 saw a fundamental change in the market. As cheaper sugar from Asia forced prices down, Brazilian millers stopped producing so much sugar, with many turning to ethanol instead. It was reported that even the most efficient mills were losing money, with a predicted drop in sugar production of up to six million tons per year.
At the time, it was noted that the market price was below the cost of production. Government subsidies in some countries can also have a negative effect, as it encourages farmers to produce more sugar than the market demand warrants.
Health concerns are also worth bearing in mind. A lot of people are now interested in using healthier alternatives to sugar. Having said that, global consumption is predicted to grow in 2019/20 to 176.45 million metric tons, from 173.95 in 2018/2019.
Technology changes also make it easier and cheaper to make sugar than before, with automated processes cutting down on the labour force cost.
The Current Price and Part Trends
Despite the drop in production in Brazil that has already been noted, the price of sugar hasn’t really recovered. At the time of writing, it is at under $0.15 per pound.
The last few years have seen this price move between $0.10 and $0.23. Before that, it reached over $0.60 in the 1970s but it also sunk to just $0.03 in the same decade.
Some sources suggest an increase by a modest amount in 2020. We have now seen the negative effect of too much supply pushing down the price. This has led to production being cut, most notably in Brazil. The conditions could now be right for the price to creep up.
A good sign is that Jose Orive, executive director of the International Sugar Organization, thinks the price hit its bottom in June 2019. At this point, it was priced at around $0.12 and has climbed since them.
He thinks that there will be a global sugar deficit of about 3.5 million tonnes in 2019-20, increasing to nearly 6 million tonnes in 2020-21. This contrasts with the surplus seen in the last few years.
Don’t expect huge increases, as production costs are now so low in many of the countries that export sugar. However, the signs point to a steady recovery of the price of sugar this year.
Image by David Dewitt
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