Bullish on This Commodity

You’d have to have been living in a faraday cage in the wilderness for a few years to not know that commodities have fallen from their prime. (In which case, congratulations for finding this article.) Some effects are more than welcome, lower petrol prices being one. For the most part though, this is bad news. Particularly for Australia, which relied so heavily on commodities to see us through the GFC.

But there is one commodity that is set to face its first global shortage in four years. Bloomberg reports:

Production will trail consumption by 2.5 million tonnes in the season that started in October, reversing surpluses from the previous four years.

While commodities from grains to metals fell the most since 2008 last year, sugar was one of the few that rose. Prices increased 5% in 2015. Sugar came third in Standard & Poor’s GSCI index of 24 raw materials, after cocoa and cotton.

Sugar has a longer life cycle than other raw materials. That means it’s more difficult for farmers to quickly adapt to demand. The increase in production during the last boom in sugar prices back in 2010–11 is still affecting supply today. But the surplus is coming to an end.

Australia is the third largest raw sugar supplier in the world. It is the seventh largest agricultural export in Australia. 80% of our sugarcane is exported. It generates $1.7­–2 billion in revenue from 4,000 cane farm businesses and 24 sugar mills across Australia. Sugar is big.

Despite Western concerns about the health impact of sugar, there doesn’t seem to be waning demand. In fact an increase in emerging markets has more than made up for any lull in Westerners’ appetites. China brought in a record 4.8 million tonnes of sugar last year. And 2016 is shaping up to be another big year, providing it remains profitable for refiners. Bloomberg reported:

Tightness in sugar supplies is already being felt in the market for refined sugar, where its premium over raw sugar rose to a five-month high of $US117 a tonne on Friday. The so-called white premium is widening on stronger Chinese demand and El-Nino induced delays to crops in Central America, and is also increasing profits for refiners.

A combination of bad weather delaying crops, a slow life cycle and reserve supplies running low have made this commodity one to watch.

If white premium gets much higher from current levels onwards, it becomes economical for a lot of the refiners to start producing whites.’ Says Kona Haque, head of research at commodity traders ED&F Man. ‘The market is finally reflecting changing fundamentals.

That means traders will be watching yield numbers and sale prices carefully. If yield is down and prices are up, they may start producing more of the white stuff.

But sugarcane isn’t only used as a sweetener.

What about biofuel?

The world’s most popular biofuel is ethanol. It’s made from the fermentation of sugarcane juice and molasses. It’s clean, affordable and low-carbon.

But with a finite yield of sugarcane, traders will have a choice to make. Ethanol or refined sweetener? ‘It’s not a foregone conclusion that you will have a big sway towards sugar, although it feels that way right now.’ Says Haque.

This scarcity will likely be short lived though. Dry weather here in Australia has been good for our recent crops. It has allowed for higher sugar content, and because of the longer growing season it means higher yields in 2016.


Sophie Hobbs, Money Morning

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