Last month, sugar prices hit their highest point since 1981, driven by two disappointing crops in the largest producing countries––India and Brazil. In early February 2010, the most negotiated contract for unrefined sugar with a May delivery peaked at $0.29/pound, a 142 percent increase in less than 16 months over the price of about $0.12/pound that was recorded on October 23, 2008.
Considering the increased demand from heavily populated Asian countries and lowered refined sugar inventories, most experts were planning for a global supply deficit close to a shortage situation. The French bank Société Générale estimates that production will be inferior to a demand of 7.2 million tons, while Sean Diffley––one of the most respected experts in the trade, former head of sugar operations at ED&F Man and current CEO of Tropix Capital Management, a hedge fund specialized in tropical commodities––indicates that the situation will quite probably become white-hot in the third quarter, when Brazilian exports will reach their seasonal bottom level.
Yet… In a few weeks, sugar prices visibly dissolved with no modification in supply. On March 5, prices dropped by 25 percent against the record logged in early February to reach $0.2124/pound in New York. During the single first week of March, the price declined by 10 percent. This situation is all the more surprising since the market is still in the red.
The few attempts made to justify such market turnaround in spite of unchanged parameters suggest long-term prospects for a return to stability next year, as well as a reduction in demand caused by soaring prices. A weak line of reasoning …
In fact, this situation demonstrates that it is very difficult to forecast the fluctuations of sugar prices, and more generally of other agricultural commodities, by analyzing the physical supply and demand components. In the automobile industry, it is unthinkable to imagine a price decrease whereas the market experiences a shortfall. This is actually the principal specificity of agricultural markets, and this is why it is necessary to implement specific regulation instruments.