Sugar prices have experienced a multi-year bull run since hitting lows in April 2020. In 2023, markets saw an accelerated upward movement in prices, with a notable surge occurring between March and May, propelling prices from around 20¢/lb to above 25¢/lb. In mid-June, prices declined again and for food manufacturers and consumers alike, there would have been hope that prices would continue to subside throughout the rest of the year. In the last week, sugar prices soared by over 10%, reclaiming levels above 25¢/lb. In this week's blog post, we delve into the primary reasons behind this sudden and substantial price climb.
Possible Export Ban from India
The recent rally in sugar prices is a result of an interplay between fundamental risks and the market’s reaction. On August 24th, Reuters reported a potential ban on sugar exports from India for the 2023/24 season. This comes after a season in which Indian sugar mills were allowed to export only 6.1 million tonnes, a substantial reduction from the 11.1 million tonnes exported the previous year. Furthermore, India imposed a 20% tax on sugar exports back in 2016.
These decisions align with a broader trend of India taking steps to manage food prices, evidenced by its ban on white basmati rice exports earlier in the summer. These actions are driven by the upcoming election next year and the government's efforts to control domestic food prices. The combination of reduced exports and increased taxes paints a clear picture of India's intention to prioritize domestic food security.
Droughts and Doubts
The influence of the El Niño climate phenomenon plays a significant role in the current state of the sugar market. India, a major sugar producer, has experienced below-average monsoon rainfall this year, with reports indicating a 50% reduction compared to the average. Such diminished rainfall could impact sugar crops over multiple years. Notably, the effects of El Niño are not limited to India. Thailand, the world's third-largest sugar producer, has also faced below-average rainfall, which is anticipated to negatively affect sugar crop yields. Barchart.com recently reported that sugar-trader Czarnikow had stated “Thailand 2023/24 sugar production would drop -31% y/y to a 17-year low of 7.4 MMT due to dry weather”, showing the extent of the effect the changing weather can have on sugar production.
The combination of export bans, climate-related supply constraints, and ongoing uncertainties has created an environment conducive to higher sugar prices, as has been reflected in the past week of trading. However, these factors may also keep prices elevated for longer. Citi, in a recent commodity report, revised its Q4 2023 sugar price forecast to 25.5¢/lb, underscoring the supply concerns emanating from India and Thailand. ChAI’s Quarterly Average Price Forecast from August 31st, shown below, indicates that prices will continue to remain around the 25.5¢/lb mark into 2024. Looking ahead, changing policies could be as significant as changing weather for sugar prices.
ChAI’s Quarterly Price Forecasts for Sugar, from 30/08/23