Sugar Highs?

​A combination of existing crop damage, higher probabilities of poor weather in key growing regions and strong demand in the oil market are all factors that could drive the sugar prices higher. During the second quarter of 2021, the sugar market went on a tear, gaining about 20% since March 31.

This rally was primarily driven by dry weather in Brazil and the resulting deterioration in the crop.  Sugar cane likes warm, moist weather for optimal cultivation. In addition to the dryness, falling temperatures in late June have caused concerns that Brazil’s cane crop has been damaged further. Add frost into the equation and the crop is under even more stress. Farmers and traders will be monitoring the weather and the condition of the crop closely to ascertain the extent of the damage. Consequently, harvesting may pick up the pace which may indicate a decline in yield.

Last year, the 2020-21 season, Brazil exported 32 million metric tons of sugar, around half of global exports. For the current 2021-22 season, the USDA sees those exports dropping by approximately three million tons.

Lets turn our attention to the crop in Asia beacuse it may take a hit too. Thailand and India were the second and third-largest exporters last year, and they could see their crops damaged by a possible drier monsoon than usual later this month. If this happens, then we'll start to see the impact in later July. This is a concern because these two countries account for 21% of global exports.

We also need to take into account the orice of cruide oil as this will be a key driver of sugar prices. Brent oil has recently hit $77 on strong demand and tight supply as well as the recent disagreements in OPEC and it allies. Last weekend, the Organization of Petroleum Exporting Countries failed to reach an agreement on increasing oil-production quotas, sending shock waves through the market for crude.

The cane harvest in Brazil doesn’t only go toward making sugar as some of it is used for conversion to ethanol, which oil refiners blend into gasoline. When oil prices are elevated, some refiners switch to ethanol for use in gasoline blends to reduce costs. Consequently,  that increased ethanol demand boosts demand for sugar, helping to support higher sugar prices. Historically, there is a correlation between higher oil prices and higer sugar prices.

|The sugar markets are relatively thinly traded which means we could see some rapid price movement. In weather markets, forecasting can be tricky and if you add in the geo-political landscape, it becomes even more of a challenge. However, the odds look to be in favor of higher sugar prices at this time.

So how can we play the sugar market? Bullish sugar traders can buy October-dated sugar No. 11 futures contracts on the ICE Futures U.S. exchange. However, not all traders want to pay the ICE exchange fees so an alternative is to purchase the Teucrium Sugar exchange-traded fund (ticker: CANE), which tracks prices of sugar futures.