Sugar and the Commodity Supercycle

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While Asian economies have high growth potential, they will become increasingly in need of the agricultural production of the west.

The idea of a ‘Super Cycle’ in commodity prices was conceived over a decade ago as it became apparent that rising demand from the developing world would create a surge in demand for commodities to support a rapid rise in living standards, industrialisation and urbanisation.

What is apparent today is that while the Asian economies have the greatest growth potential both in terms industrialisation and the development of their own consumer markets they will become increasingly in need of the agricultural production of the west.

We believe that it is these trade flows that are likely to become ever more critical to the global trade cycle and of course how sugar fits into the broader commodity cycle.

  • Despite the concerns over the global economic outlook 2013 is expected to see yet another year of record global trade as the physical economy moves forward in spite of problems in the financial world.
  • In sugar, Brazilian sugar production and exports have continued to hit new highs illustrating the difference between financial and physical markets. Falling sugar prices do not equate to falling demand.

“Growth in sugar demand is largely driven by low income consumers. Consequently rising affordability for sugar, and across the food sector, is positive for consumption growth.”

Toby Cohen, Czarnikow Director

Record Physical Trade

  • The continued growth in exports from Brazil is indicative of one of the key themes that is dominating the economic outlook: The flow of commodities between West and East.
  • The biggest markets for raw sugar today are Indonesia and China while the refineries in the Middle East and North Africa bring underlying demand in this high growth region to the raw sugar market.
  • Despite falling prices and the bearish sugar outlook, global trade has been running at record levels.
  • This is in contrast to the idea that the boom in demand for commodities is over. Sugar prices have been falling because of the production response to high prices, not because of falling demand.
  • Affordability is rising, which is helping demand growth. And rising demand is one of the key themes that spurred interest in commodities in the first place.

Energy, Metals and Agriculture

  • When investors initially began looking at commodities the main focus was on energy.
  • In 2003, the development of flex fuel technology re-invigorated interest in bio-ethanol in particular in Brazil while within the US the ambitious RFS set out a pathway for the diversification of the US's energy requirement, providing a demand linkage to agriculture.
  • In addition, industrialisation and the manufacturing boom of the past decade drove up demand and the cost of metals, flowing back into higher agricultural costs given increasing mechanisation.
  • These connections remain very valid today and though the correlation between asset classes seems to be unwinding the underlying dynamics of the relationships between the energy markets and the agriculture markets will continue - in particular in Asia as agriculture continues to develop.

“Looking further forward it is apparent that the sugar prices are reaching towards a low point in the cycle given the conflict between short term and long term price signals.”

Stephen Geldart, Senior Analyst

Social Economics

  • Asia is now facing a similar challenge to that which faced Europe's post-war policy makers; how to support and develop agriculture?
  • Chinese sugar cane prices are now around $75/ tonne, which is very high by global standards while it is also interesting that India is similar and Thailand is also facing a problem with rising farming cost.
  • Economic growth has benefited those in urban areas at a faster rate than those in rural districts and in order to maintain a social balance and food supply, Asian governments are forced to increase farm prices.

Conclusion

  • The long run economics behind the idea of a super cycle in commodity prices can be simply expressed as lack of long term investment coupled with low prices in real terms and growing demand. In sugar it is clear that this is still relevant.
  • World market prices for sugar are now back to levels that are insufficient to reward new investment.
  • On the demand side, the fall in global prices is having a positive impact on trade and consumption.

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