Wait and See as Sugar Reaches a New Support
Sugar is one of the most-used commodities in the world today. It is used in a whole range of food products such as cakes, confectionary, and other processed foods. Most of the sugar produced today comes from sugarcane, while part of it comes from other sources.
Most of the world’s sugar comes from Brazil, which accounts for more than 25% of all sugar produced. Other major sources of sugar come from India, China, and Thailand.
Sugar processing industry is often a low margin industry because of the high costs of operations. This makes smaller companies with less farmland and farmers become vulnerable to low margins. For this reason, most countries within the sugar industry tend to be supported by the government. Without the support, most of these companies would be endangered.
The price of sugar has been falling. It peaked in 2016, when the price reached 24 cents per pound. Since then, the price has declined and currently reached 11.42 cents. The decline in the price was partly because of oversupply of sugar in Brazil and other countries. Another less-talked about factor that affects the price of sugar is the price of crude oil. As shown below, the two commodities have an inverse relationship. As such, when the price of crude rises, the price of sugar tends to fall.
The reason for the inverse relationship between crude oil and sugar is mostly because of ethanol. Ethanol is a byproduct of sugar and is a popular biofuel. Another reason is economic growth and the role of the dollar. As the economy faces the challenge of a trade war, the price of most agricultural commodities has fallen. In addition, a stronger dollar has made it expensive for traders to buy sugar in countries like Brazil and India.
This month, the price of sugar futures has fallen and is currently trading at a narrow range of between 11.7 and 11.25 cents per pound. The price is below the short and medium-moving averages. In the short-term, the price of sugar could continue trading within this narrow range as traders wait for the developments on trade. The downside for the sweet commodity is the 10 cents per pound mark.