Over the Easter bank holiday weekend, many consumers will have noticed the higher cost of Easter eggs compared to previous years. While the issue of inflation has received a lot of press coverage in recent months, a key ingredient for the Easter sweet treats has surged in price recently; sugar. ICE Sugar No.11 prices, the global benchmark for the commodity, had been trading at 5-year highs from early February and have continued to climb since then.
On 11th April, sugar prices climbed above the peaks of October 2016 and are now trading at the highest level since Spring 2012. This rise in the trading price of sugar has also been reflected on supermarket shelves in the UK. The Grocer reported that by January sugar reached an average price of £1.06/kg in British supermarkets according to the official Retail Price Index, which was already a 10-year high back then. Given the prevalence of sugar, and therefore its role in driving food price inflation for consumers, it is worth examining some of the key reasons behind its recent rise.
A Sugar Mill in Uttar Pradesh, India
Pressure on Sugar Supply
A key driver of recent bullish price movements for sugar has been cuts to production forecasts announced across various growing regions around the world. This has particularly been an issue in India, the world’s second-biggest exporter of sugar, where mills have had to close early due to a lack of available sugar cane. As noted by Reuters, 155 of 210 sugar mills in Maharashtra had closed production for the season by the end of March. The region produces over a third of India’s sugar and in the 2021/22 season there were mills operating until June, whereas almost all are expected to be closed by the end of April this year.
India’s reduced sugar production and its subsequent impact on global prices has been compounded by the reduction in planned exports of the commodity. The government has only allowed Indian mills to export 6.1 million tonnes of sugar this season, in comparison to 11 million tonnes in the previous year. Due to the high prices and short supply of sugar in India, it is also unlikely that this figure will be revised upwards. The combination of a smaller crop and reduced exports from a key player in the international sugar market has been a key factor in recent price rallies.
It is also important to note that supply side issues are not confined to India. In Brazil, the world-leader for sugar production and exports, heavy rain forecasts for April may delay harvesting the current crop and further pressure supply. Meanwhile in Europe, where over 50% of global sugar beet is grown, the European Association of Sugar Manufacturers announced in late 2022 that the 2022/23 sugar output from the EU would fall -7% y/y to 15.5 MMT, as reported by Barchart. Unusually warm weather across Europe over the past year has damaged the sugar beet crop through heatwaves and drought.
Market Forces Making an Impact
There are several factors relating to the sugar market, and less connected to the physical supply and demand, that have contributed to the recent rise in sugar prices. One market force that has caused further supply pressure in sugar has been the rally in crude oil markets following OPEC+’s announcement of a production cut at the start of April. When oil prices increase, sugar prices tend to subsequently rise as more sugar crops are diverted from mills to produce ethanol rather than refined sugar. This relationship between sugar and oil prices has been discussed in detail in this ChAI blog post, and is especially relevant in the two leading nations for sugar production; Brazil and India. This oil-sugar relationship has played a key role in boosting prices for the latter commodity in recent weeks.
Another market force that has supported prices is the lack of deliverable sugar ahead of the May contract expiry on Friday 14th April for ICE White Sugar Futures. As reported by Bloomberg, “large open interest signals that some traders without physical supplies may need to close out short positions, supporting prices.” While a different benchmark to the Sugar No.11 contract, this indicates the overall tightness in the global sugar market, as well as demonstrating the importance of tracking exchange data when formulating a market outlook.
Looking ahead, a key piece of bullish data that is driving ChAI’s forecast is Commitment of Traders reports. As shown by the graph below, the number of long positions has doubled since August 2022 while short positions have almost halved. In the coming weeks, attention will turn to the harvest from Brazil, and the country’s ability to export it efficiently, as a key driver for calming prices from their decade-high peaks.