Analytical Essay on Sugar Trade: Demand, Supply and Price Formation

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-to2017-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/