Looking at world sugar prices over the past 50 years there is anecdotal evidence of a recurring 5 to 6-year cyclical element to world sugar prices.
• A price cycle in sugar is typically seen as reflecting the perennial nature of sugarcane which results in a delayed and muted supply response by farmers (and millers) to changes in world market prices.
• Delayed and muted production responses are also symptomatic of government intervention in many countries that de-sensitises local prices from world market prices to varying degrees.
• A global surplus builds over several years which typically sends prices down to levels that are insufficient to reward new investment in supply capacity.
• Prices rebound when steadily rising global sugar demand is eventually met with under-investment in new production capacity, triggering a period of global sugar deficits.
• The price cycle is typically associated with 3-4 years of surplus followed by 2 years of deficit.
Few would argue that since late 2016 we’ve seen the down-phase of the cycle and perhaps even the bottom when prices in August 2018 reached 10 year lows. Since that time world prices rebounded a little (on the prospect of a more balanced global market outlook in 2018/19) but have since tended to remain range-bound between 11.5 US cents/lb -14 US cents/lb, struggling to break further to the upside. To the surprise of some, last week NY sugar futures broke to the downside, falling lower than 12 US cents/lb after trading between 12 US cents/lb-13 US cents/lb for as long as 7 weeks. This breakout to the downside has to be seen in the context of a prospective global modest deficit in 2019/20 (October-September). Analysts brave enough to look this far forward suggest a further slump in production as against a modest rise in consumption.
But even if world production in 2019-20 falls 1.5-2 mln tonnes short of consumption, as forecast by some observers, this would not lead to a genuine scarcity of supplies, after two successive seasons of production surplus. India’s stocks remain high in particular and would need to be reduced substantially before any upward momentum in prices can be sustained.
At the risk of being simplistic, and appealing to the global price cycle, we are unlikely to see a price upswing kick-in until later in 2020 - when the current low price environment will finally show through in lower sugar production. But prices would only rise significantly in 2021 should true scarcity bite and more sugar is needed from Brazil (a price incentive to make more sugar and less ethanol). A price upswing is also predicated on India and other countries being able to stop producing a crop that still remains profitable for farmers. To the extent that sugar industries continue to show no or only limited supply response to the low world market price environment, there is a real risk that the sugar price cycle will be extended and hopes for a significant upswing by 2021 could prove too optimistic.