What Drives the Price of Sugar? Sugar Trading Strategy

WhatDrives the Price of Sugar?

1.   Global Supply

2.   Global Demand

3.   The Brazilian Real

4.   Government Subsidies

5.   Weather

6.   Health Concerns

7.   Ethanol Demand

8.   The US Dollar

Global Supply

The key driver of sugar prices is the global output of the commodity.

The typical planting to harvest of sugarcane takes 12 to 18 months. 

Farmers have to prepare the soil, seed, irrigate and harvest the crop during this cycle. 

When farmers expect a favorable demand climate, they plant more crops, and when they expect weak demand, they plant fewer crops.  

When demand exceeds or fall short of supply, prices react accordingly.

Global Demand

An important constituent of global demand is the correlation between affluence and sugar consumption.

Since sugar is viewed as more of a luxury than a necessity, wealthier economies generally have higher consumption than poor economies. 

Emerging economies in Asia and South America are the fastest growing consumers of sugar, so continued strength in these economies is positive for prices, while an emerging market bust could depress prices.

The Brazilian Real

Brazil produces and exports such a large percentage of the annual sugar crop that fluctuations in its currency can have a major impact on sugar prices.

When the real is weak, Brazilian farmers have an incentive to produce more sugar for export to countries with strong currencies and greater purchasing power.

When the real is strong, Brazilian farmers are more likely to sell in the local market, where sugar is used to make ethanol, and receive reals for their sugar.

A weak real means greater supply on global markets and lower prices.

 

Government Subsidies

The sugar industry has a long history of government subsidies and tariffs being used to protect local sugar producers.

Subsidies and tariffs distort the market by creating artificially high supply and depressing prices. 

If the largest sugar-producing countries stopped subsidizing growers, then production could fall and prices could rise.

 

Weather

Successful sugar crop production requires frost-free conditions and ample rain during the growing season. 

Since sugar production is heavily concentrated in a small handful of countries, poor weather conditions in one or more of these countries can have a very disruptive effect on supply.

 

HealthConcerns

Sugar consumption has been linked to diabetes, obesity, heart disease, tooth decay and other ailments. 

Governments are under pressure to address high obesity rates, and this could lead to taxes and restrictions on high-sugar items.  

Health concerns could lead to a decline in sugar consumption and a fall in prices. 
 

Ethanol Demand

Sugar can be crushed and used as an ingredient to make ethanol. 

Since ethanol competes with gasoline as a fuel source, its demand often moves inversely with oil and gasoline prices.   

A fall in oil prices could depress sugar demand for ethanol, while higher oil prices could increase demand.

TheUS Dollar

Sugar, like other commodities, is quoted in US dollars. Sellers of sugar receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak. 
A strong US dollar depresses sugar prices, while a weak US dollar lifts them.