Category: Sugar Trade

Introduction

Over the past decades, sugar trade and sugar consumption all around the globe has increasingly raised. Approximately 46.1 million metric tons are officially and exported every year making a market value of over 17.1 billion $. Moreover, cane sugar sold as compliant accounts for 1% of exports at the same year that the research was deducted. As we underline the importance of the sugar cane trade in the world trade, recent charts have shown that the sugar market is undergoing a highly important economic growth during the last decade (2006-2016). Remarkable as it may seem in the middle of this ongoing process, 2012, the annual economic growth rate was in 106% with signs of even higher and advanced growth in the foreseeable future. Additionally, it seems to be a country-orientated oligopoly market with the powerhouses of Brazil, India and China dominating, having combined the 86% of the global sugar trade. As far as premiums and pricing are concerned there is a 10 to 15% premiums range for organic sugar and up to 21 % for double-certified Fairtrade compliant sugar. Having already mentioned the above, this chapter aims to provide an in-depth analysis of the market, thoroughly examine the demand and supply for sugar trade and assures that at the end of this chapter will be laid out a -regarding the circumstances- accurate forecast for the future price of the commodity.

Production centres

Global production for the Marketing year 2018-2019 is 181 million tons (raw value) as higher production is indicated in Brazil as it has been already mentioned, that alone accounts for almost 52% of the sugar market, but also in the European Union. Regarding Brazil, as the major player produced 37.3 million metric tons in the year 2018/2019, but it has to be mentioned that this was the lowest production level since 2009, due to the poor conditions that are taking place, like low prices and droughts. But, the Brazilians are very well equipped to run on sugar and ethanol market –very important as an alternative fuel– and they have proven that their production is very effective and efficient. As a result, consumption, exports and stocks are all up, due to the high production level.

EU sugar production faced an almost 20% increase in the year 2017/2018 in the average of the last years and it was even more stable, as it seems the next year, since the prices followed the tendency to fall. The fact that sugar production is rising up to that levels, also means that a big quantity of jobs are provided, for instance, there are roughly 145,000 sugar beet growers in the EU, spread between 20 different Member States and with around 28,000 direct jobs in the sugar beet processing sector. But, consumption is projected to be slightly lower as EU domestic sugar consumption has been stagnating for the last few years, mainly because of the consumer preferences for lower sugar containing diets.

India was the first country to ever produce sugar and inconceivable as it may seems its production part has taken a decline turn resulting in a reduction of 8 percent of the total production and exports. That is quiet incredible if someone considers that India is expected to be one of the major trade exporters in the future with economic and population growth that exceeds the single digital numbers percentage-wise, leading the consumption level to a record.

Thailand’s record levels are also rising (10.02 million metric tons in 2018/2019), due to the expanded acreage of the geological configuration of the country and the favorable weather conditions. Because of the higher returns and profit, a big quantity of Thailand’s farmers turned their interest from cassava to sugar production, increasing, even more, the production level. About the consumption level, it is also slightly up, because of the demand for direct sugar consumption.

Last but not least, the production of sugar in China is steadily decreasing reaching the level of 11.47, but the huge domestic demand-led China to be the largest importer of white sugar in the world with the result of facing huge tariffs and permits and the stocks are expected to fall for a fifth consecutive year due to the gap between domestic consumption and production.

In the Figure 2 is more clearly visible the importance and the level of the sugar producing countries around the globe. But it has to be noticed, that mainly a percentage of 70-80% of the supply of sugar is absorbed by the origin-country. This phenomenon occurs as a consequence of the fact that the majority of the countries heavily subsidize sugar farmers and place tariffs in sugar imports.

Figure 2 Production Centers of Sugar

Source: https://www.iisd.org/sites/default/files/pdf/2014/ssi_2014.pdf#page=267

Consumption

Consumption also is rising (as it has been for the last 25 years), as it has been already referred above, not only because of the increasing demand from the exporting and producing countries, but also due to expansion and growth in markets such as Egypt, Indonesia and Pakistan. The global consumption of sugar amounted to 176.45 million metric tons in 2019/2020 and it is projected to boost even more the upcoming years. Dominated by this high demand, exports are climbing and the global stocks are achieving an 8% decrease on reductions in India, China, Pakistan and Thailand. The largest consumers of sugar are considered to be China, Brazil, India and EU.

The power of demand & supply

Sugar’s diverse applications make this commodity a very crucial one for the global market. Initially, its significance was concentrated in the agricultural nature of the product, therefore, nowadays with the international oil prices to be rising continuously, in the attempt of some countries to gain independency on oil, the sugarcane ethanol and other various bio-system alternative energy solutions found great correspondence. The outcome of this was that sugar market acquired the right to affect the oil prices, which causes serious influence to the global economic situation and impacts to international shipping. Having on mind all these aspects, it is considered important to analyze the determinants that affect the two major powers of the market of this commodity, which is certainly demand and supply. Sugar’s demand is related to the price of sugar in the spot market and the GDP index, both in the form of overall economic level, as well as the pattern of the economic level of the population (i.e. the income). Furthermore, GDP can be considered in constant or current prices, although demand reacts more flexible to growth in GDP/capita, than to a change in the overall value of the GDP. And the life expectancy ratio as an indicator of the life quality is also an essential part. It is quite noticeable that sugar’s demand is inelastic, since it belongs to the category of the complementary products which are commonly flexible and they are constantly maintaining a negative correlation between each other, exactly as coffee and sugar interact. In addition, the proportion of income spent on the good, which is literally a limited amount, and additionally the time elapsed until the price change, that will be discussed more extensively in the next chapter.

Undoubtedly, the existence of a powerful alternative substitutes-market involves in the previous topic, but this category of products does not set sugar’s demand elastic, although this tendency may appear in the future. Although, the level of sugar consumption and demand is a critical factor in the case of public health, since even the World Health Organization (WHO) reported that because of the various dangers that a heavy sugar diet can provoke, such as diabetes, heart disease, dental problems, obesity, high cholesterol and high blood pressure. The global sugar substitutes market was valued at USD 6.35 billion in 2018 an it is expected to increase even more the next decade, since they actually replicate sugar’s taste but consist less food energy/calories.

Figure 3 Market Size of Sugar Substitutes

Source: https://www.fortunebusinessinsights.com/industry-reports/sugar-substitutes-market-100261

The sugar substitute trend is not spreading so widely only because of the realization of energy imbalance between calories consumed and calories expended, but also due to the “all-natural” trend resonating in the global marketplace. The major player in this market is Roquette, which has already developed a range of Nutriose soluble fibers which combines the half calories of sugar with a reliable clean-label solution for sugar reduction projects.

Figure 4 Global Substitutes Market Shares for Selected Alternatives

Source: https://www.fortunebusinessinsights.com/industry-reports/sugar-substitutes-market-100261

The cost of global purchases on imported sugar that took place in 2018 estimated to be around US$23.3 billion. It is remarkable to be referred that the total value of sugar imports of all the countries declined 19.2% since 2014, that the total amount of purchases were counted $28.8 billion. From 2017 to 2018 the value of imported sugar was depreciated by -25% (!) This phenomenon occurs because of a combination of features, but the most crucial one is the enforcement of taxes and the 4-digit Harmonized Tariff System code prefix which is implementing for sugar (1701), that will be examined more analytically later in this context. From a continental perspective, Asian countries, such as Indonesia, China, Malaysia and South Korea, during 2018 noted the highest dollar worth of imported sugar, estimated at $10.8 billion, an amount that consists the 46.6% of the total global worth. Also essential is considered to be all the African importers with a percentage of 20.6% and of course the EU with an average number of 19.6% of the worldwide delivered sugar. North American Nations follows with the percentages of 9.4%.

Demand is impossible to exist and function without the corresponding power of supply to interact. Thus, the main determinants of the supply of refined sugar on the world market are of course the price in the current and the previous period, the amount of sugar reserves and the quantity of consumption. It can certainly also be anticipated that the main element of supply is the actual production of the commodity, but both of raw and refined sugar, since raw sugar is indispensable for the production of refined sugar and last but not least the geographical region where the sugar canes and beets are grown. Brazil except the largest producer, also has the highest export volume of sugarcane (29.1% of total sugar exports), if we take into consideration that the two thirds of the sugar produced is exported to more than 100 countries, which depend on Brazil in order to satisfy their domestic needs. Examples of these counties are Russia, India, Iran and Saudi Arabic Emirates. The other leading sugar exporters are Thailand, Australia, India and Guatemala. More specific, the global sugar exports during 2018 reached US$22.5 billion, but year over year this value fell by 24.5% from 2017 to 2018. Among continents, Latin America sold the largest dollar value worth of sugar exports during 2018, estimated at $8.5 billion and also countries of Asia, like Thailand, India and Myanmar, are responsible for 26.6% trailed by European suppliers at 23.3%. Lowest significance percentages come from countries such as Africa (8%), North America (3.9%) and Oceania (0.5%).

Regarding the specific routes that take place in the sugar market in order the commodity to be delivered from the production region to the consumption destination, it will be extensively examined in the next chapter.

Price formation

Taking into consideration the fundamental powers of demand and supply having been already mentioned in the text above, it can be effectively understood that the adjustments of those two curves create the market price. As remarkable as it may sound the fact that sugar price has been astoundingly increased over the last decade, we are to identify the reasons behind this expected (?! Or unexpected) turn of events. 1971 marked the year of the financialization of the world economy as there was a push aside of the Woods and the Smithsonian systems resulting in the implementation of the freely floating convertible currencies as well the commercial and investment banks created opportunities with a strong financial incentives for the speculative sectors in advanced market economies. Speculators of this kind could be both individuals and institutionals taking part in selected markets such as the derivatives, the foreign exchange and the commodities. The progressive financialization led the speculative prices to rise often and significantly above the real ones, contributing in the sacrifice of market stability and predictability for the sake of profit via sudden price fluctuation.

Implementation of this practice is encountered in the agricultural commodities and specifically in sugar. New York, London, Tokyo, Sao Paolo, Beijing and Moscow which are the important trading commodity exchange centers have all been witnesses of a high frequency in price fluctuations over the last two decades (the time gap between the adoption of the speculation practice and the beginning of the price volatility is mainly due to the reaction and adaptation of the market to the new dynamic environment). Paradoxically, the price volatility is constantly decreasing in terms of range (low to high), however the frequency of the fluctuations increases in the long term. The apparent instability of the market in compound with the opportunity of high short-term revenue attracts other speculators into this segment. Still today the impact of those speculators is fairly limited compared to the initial forecasts, but the growing interest in the market poses a certain threat for the future as the share of the speculators in all of the closed transactions is steadily increasing.

Estimated global sugar production traded in those commodity exchanges reaches up to 28%. This sector of financial market is where the institutional speculators in the recent years have shown their greatest interest. Such speculators are mainly large hedge funds, major investment banks and some major -so called- “shadow bank investors” who use their comparative advantages in a lower level regulation by the Commodity Future Trading Commission (CFTC). In comparison to the effect that the speculators in the sugar market have created, it is quite fair to mention that since the speculators have begun taking action in the market, the swinging prices in variation bands have considerably decrease to +/- 10% when it used to be +/-20%. Such changes create a positive perception about the market, especially if someone takes into consideration the balance in the information spread among the market players and their later ability to react flexibly and effectively in the price fluctuations.

Figure 5 Price Development

Source: https://www.researchgate.net/figure/Raw-sugar-world-price-development-see-ISA-from-1920-to-2017-March-in-US-cents-lb_fig1_324843312

As of the current marketing year, investors are witnessing a sugar surplus leading the international sugar prices to be rather low in the beginning of the period reversing the uptrend observed in the last 2 years. However, it seemed to be a false alert as the price was heavily expected to recover, since the rising demand in countries where consumption per capita is lower compared to the world average. As strong as the expectation of an increase in price might was, the real increase in the price could be accurately described as a modest one, since supply is to remain abundant following high prices in the recent year. Last close price for the commodity was in 19/11/2019 in NYMEX No.11 Sugar (YO:NMX) at $0.1269. The current year started relatively slow for the market reaching the price of $0.1169 but soon recovered to an avg price of 0.125. From the early July till the 3rd week of September there was a huge downslide in price resulting in $0.1081 closes but later in autumn the price recovered to the current close price.

Combining the evidences, we have raised above, as far as the harmful impact of sugar is concerned as well as the diseases caused from the consumption of it, such as obesity and diabetes, the World Health Organization (WHO) in the latest years has reported statements underlying the necessity for a cut down in the sugar consumption. In the organization’s statement is also distinct that even though it believes that nutrition education and other behavior-changing interventions designed to decrease consumption on sugar based drinks and food (mainly sugar-sweetened beverages) can be effective, widespread and lasting behaviors can be difficult to be achieved in adults as nutrition habits are often established during childhood and are difficult to be modified later in life. Thus, WHO is proposing several interventions aimed to limit the consumption in adults, amongst them, the sugar taxes.

Evaluating this pressure from the WHO,in combination with the domestic rising levels of diabetes and other sugar related health issues, some countries around the world have proposed in recent year a taxation system aiming in the decrease of those problems. Countries like Mexico, Hungary, Britain, France, Finland and Denmark have recently followed the example of many others. The vast majority of those countries though, have implemented the taxation system not in the sugar trade, but in the final product of sugar, mainly sugar based beverages. In my opinion this happens, because, as it has been already mentioned the sugar trade is a country-based oligopoly. As an effect, an implementation of a sugar trade tax can be seen from the exporting countries as a trade war. What seems to be the go-to practice is a tax system either in the form of a volume based excise tax or a sales tax in the sugar sweetened beverages. The experience in the field has shown that in the lower-income countries such as Mexico a sales tax proved to be undoubtedly effective resulting in a 12% reduction in consumption just in the first year with a 10% tax on sugary drinks. On the other hand, the volume-based excise tax seems to be potent in the case of higher income countries. For instance, the Hungarians brought a volume-based excise tax in sugary drinks, paving the way for an incredible 40% decrease in the amount of sugar in the products.

Forecast

After all this extensively analysis of the market situation, the interaction of the powers of demand and supply and of course the formation of the price of sugar, it is really important to present an accurate forecast –as exact as it can be– for the future price of the commodity, which can be characterized as neutral to mildly bullish for the year 2020. Thus, because of the high unpredictability of the world sugar market that can change really fast, where weather can turn the market upside down and a country can suddenly affect the market dynamics, because of the right to implement government interventions like subsidies and taxes, a reliable prediction is extremely challenging. Moreover, accumulated stocks are witnessed in the market, that need to be absorbed in order the price to be improved, but since the production of the largest suppliers appears to be reduced allowing stocks to fall, we can perhaps be optimistic for the upcoming years. The huge volatility of the market can also be proven by the evidence in the next table.

Figure 6 The Volatility of Sugar Price

Source: https://tradingeconomics.com/commodity/sugar

Most of the commodity charts appear to be complicated with various patterns to take place simultaneously, but this does not happen in a high level with sugar. In sugar’s long term price chart a huge descending triangle is observed, with its top in the year 2011with the price of almost 16.00 USD per pound and horizontal support at $10.50. It is expected that the current horizontal formation will progress during 2020 & 2021 and any other trend maybe will start by 2022.

But, with the current price of 12.670 USD (per pound) it is expected that in one year the price of sugar (SB) will fall at 11.453 USD, thus, sugar is not considered to be a worth-investing commodity for the next year, since its market is characterized by high risk and the investment may be devalued in the future, according to the predictions of mister Takis Tsaklanos.

Figure 7 Bullish Tendency

Source: https://walletinvestor.com/commodity-forecast/sugar-prediction

Figure 8 Forecast

Source: https://investinghaven.com/forecasts/sugar-price-forecast/

The Sugar Act introduced various merchandise that contains hides, skins, and hydroxide to the listing of enumerated commodities that is in a position to be lawfully exported at a lower place in the Navigation Acts. British Prime Minister, Saint George Grenville launched this act, Saint George Grenville was an associate degree English politician who United Nations agency determined to tax yank colonies throughout the American Revolutionary War. The 1764 Sugar Act amended the prevailing 1733 Sugar and sirup Act.

The aim of this law became threefold. First, the country accomplished that importation became close to endemic that the rule of thumb of law become undermined via unlawful modification. 2nd, defensive British modification by means of introducing new exchange laws following the mounted Navigation Acts. With those objectives in mind, the Sugar Act become designed for certain colonial modifications with international locations other than the United Kingdom of Great Britain and Northern Ireland, particularly France and Spain with colonies within the West Indies at the identical time as increasing sales to pay British debt. Admiralty courts had been placed in Halifax, star Scotia while colonial courts were native. Judges got five percent of the condemned cargo as compensation which provided them with a monetary incentive to travel wanting guilty to the crook and, as a result, sharply imposing the regulation.

This new system removed the quality of British protection to associate degree honest trial. in addition, to lowering the tax on sugar and imposing a series of taxes, the brand-new regulation, in addition, affected the modification of positive commodities. The European country is wherever lumber and iron are more the lists to be listed. Duties are born at the importation of java, pimiento, and wine from Madeira and conjointly the island and French and yank merchandise. With few exceptions’ vessels visiting the colonies were required to pass via the United Kingdom of Great Britain and Northern Ireland, unload their freight, pay obligation on it, reload it and sail to the colonies. Such policies redoubled the worth of doing business and weakened native trade. The statute of 1765 became the first inner tax levied directly on yank colonists through the country’s Parliament.

The act levied a tax on all the paper files inside the colonies, came at a time when the empire nation was heavily indebted within the seven years war and sought its northern yank colonies as a supply of revenue. This sculpture passed the statute to assist their funds once the high-priced Seven Years struggle with France. an element of the revenue from the statute is usually accustomed to holding various regiments of British troopers in North the USA to remain up peace among native Americans and conjointly the colonists. The colonial courts valid recently unwilling to travel so they will seek smugglers so that they may be prosecuted and guilty of their crimes. In 1651, the country’s Parliament, inside the first of what became referred to as the Navigation Acts, declared that the majority of effective English ships are usually allowed to bring things into European countries, that the North yank colonies ought to simplest export its commodities, consisting of tobacco and sugar, to England. This effectively averted the colonies from shopping for mercantilism with different European countries.

The act was pursued with the assistance of many others United Nations agencies that placed additional restrictions on the colonial trade and redoubled customs duties. In reaction to the Sugar, Act colonists formed a ready boycott of luxury things foreign from the nice United Kingdom of Great Britain and Northern Ireland. fifty traders from at some purpose in the colonies united to boycott distinctive gadgets and commenced a philosophy of autonomy wherever they turn out those merchandises themselves, significantly fabric-based merchandise. The colonial response to the statute ranged from boycotts of British merchandise to riots and assaults on the tax creditors. Vice-Admiralty courts existed at some stage inside the empire. They served one reason simplest, to resolve disputes among merchants and seamen.

Although over 130 countries produce sugar or sugarcane globally, ten countries dominate the production and trade of sugar. These countries include Brazil, India, China, Thailand, Pakistan, Mexico, Colombia, Indonesia, the Philippines, the United States, etc. These countries are also some of the world’s top consumers of the crop. Today, sugar is cultivated in countries with warmer climates, and in the tropic and sub-tropic regions which are generally located near the equator. In Australia, around 95 percent of sugar is grown in Queensland about the remaining percentage is grown in northern New South Wales. Sugar is grown along the coastline between Mosman, Queensland, and Grafton, in NSW. Most of the sugarcane is grown on the coastlines as they experience high rainfall and provide easy ways to implement irrigation technology. Weather and climate-related events, for example, temperature, precipitation, and other extreme weather disasters are the key factors that influence sugarcane production worldwide, especially in several third-world nations. These weather fluctuations also bring about indirect effects, affecting the quality of the soil, the amount of sunlight the sugar crops are given, etc. The sugarcane yields have also fluctuated with climate events that occur globally and locally, such as droughts and cyclones. The locations in which sugar can be farmed are limited by climate, reliable water sources, and the proximity to processing mills. This generally limits production to tropical climates along coastal areas, as shown in Source B. Sugarcane must also be grown near a sugar mill as the juice in the stalk of the cane will start to evaporate after sixteen hours, reducing the yield and price paid to the farmer.

Technological Method

Sugar cane grows for 12 to 16 months before being harvested, standing two to four meters high. Queensland’s sugar cane is harvested by self-propelled harvesting machines, which can be self-owned by the farmer or owned by several farmers. There are specifically two different methods to harvest the sugar crop. In some areas, it is possible to harvest the cane green. The leafy stalks of the sugar cane form an organic mulch that contains moisture reduces weed germination and prevents soil erosion. In other cane-growing areas, the sugar cane is burnt to remove all excess matter which makes harvesting and milling difficult, such as weeds or leaves. Harvesting also requires a mechanical cane harvester and haul-out tractors.

Harvesting the cane green is a productive way of farming the sugar crop. The farmers allow the stalks of the sugarcane to fall to the ground and act as “a protective trash blanket”. This is displayed in Source C. This blanket, as an organic mulch, significantly diminishes the level of soil erosion, minimizes weed germination, and maintains the soil’s nutrition for more productive crop growth. Fifty percent of the sugar crop, in Australia, is now harvested green as it provides a healthier alternative. It doesn’t affect the environment, unlike the “burning” farming method. The cane is cut green and the leaf matter is thrown onto the farm. This technological farming method helps improve the growth and harvesting of the crop through increased crop yields, prevention of weeds and pests, and distribution the nutrients evenly throughout the soil. The green cane method allows the crops to grow faster in certain areas, diminishes the pests that hurt the production of the crop, and allows the nutrients from the sugarcane to be distributed to the soil, which overall increases its quality.

There are also a few overall disadvantages of the green cane harvesting method. Common negative effects of green cane harvesting include lower soil temperatures which result in short-term yield losses, delayed growth of crops, and severe frost damage in young crops. The ‘trash blanket’ also affects the fertilizer application, where only certain chemicals can be used in order for full productivity. However, green cane harvesting does not negatively impact the environment, unlike burn harvesting where pollutants are released into the environment.

Environmental and Ecological Factors

The cultivation and farming of sugar have an environmental impact through habitat loss, overuse of water resources, heavy use of agriculturally modified chemicals, runoff of polluted effluent into local streams/rivers, and air pollution. These effects lead to land, wildlife, and soil degradation. Sugarcane is currently grown in hilly areas, which leads to high rates of soil erosion resulting from the increased rates of water runoff on sloping land. This happens quickly. Therefore, the farming of sugar has a negative impact on the environment. These sediments that come from polluted effluent even have ended up in the Great Barrier Reef. The fertilizers used on the soil have an impact on the sea life of the Reef, threatening water quality. This also occurs in other freshwater systems. Sugarcane farming has also fuelled deforestation. However, the environment is also benefitting from the growth of sugar. As aforementioned, sugar helps the quality of the soil by preserving the nutrients that increase crop productivity.

Sugarcane production also heavily depends on the environment it is grown in. The carbon dioxide concentration in the atmosphere can have an impact on the speed of photosynthesis. It will greatly increase the yield by allowing crops to grow faster. The environment’s climate also affects the growth of sugar. If the environment has a sudden increase in temperature, due to climate change, this will affect the yield. If there is a sudden decrease in temperature, the soil and air temperature will drop, and young shoots suffer frost damage, which can be permanent. When there is a flood, the crop yields will be broken down earlier, affecting the crop yields by having to restart the process of growth. The soil will also have more water than it needs, making the soil become waterlogged. The crop will suffer from a lack of oxygen, which leads to the death of the plant. It could also dramatically stunt growth. Droughts will also affect crop yield as when there is a drought, irrigated water will become scarce and sugar crops will die out. The soil moisture will also be at a critically low level.

When sugar is farmed in different places, the environment of that certain place does have an effect on how sugar is farmed, through various aspects. The topography of the place will affect sugar production, as the irrigation system will have to be adjusted in a way to deposit the runoff somewhere. The amount of rainfall that occurs in that area will affect the way the crop is farmed as farmers will need to take precautions in case of the two extremes, drought or flood. If that area’s temperature is too high, then farmers will need to build shade structures, or if it is too low, build indoor greenhouses so they can control the temperatures. If the water quality in that specific area is too dirty, then the farmers will have to source water from elsewhere or implement a freshwater desalination plant in order to purify the water and grow their crop yields. This also applies if the water is readily available as they will have to adjust their irrigation systems if they are inland or rely solely on rainwater, which is often fickle. The altitude of the place will also matter as the harvesters will have to figure out a safe way to transport their water sources.