A report released this month by the Commonwealth Bank's global markets research team found there was six million tonnes of excess sugar in the global market, meaning supply was well ahead of demand.
Having said that, sugar prices are certainly challenging the mounting surpluses as the commodity has been stuck at a historically elevated range of 19 to 22 cents a pound.
This, in our opinion, poses a good entry point into the commodity. The below shows a one-year price chart on a London-listed ETF, which we recommend as a good way of getting exposure.
Performance of ETF over 1-yr
Source: FE Analytics
Sugar prices are unlikely to fall far below 19 cents per pound as this is roughly the cost of production.
Sugar growers have to sell sugar for more than 26 cents per pound to make a reasonable profit, and with the cost of fertiliser and fuel increasing year-on-year, we expect the downward trend to reverse.
It is also worth noting the uncertainty over the effects of Brazilian weather, as well as the country’s biofuel policy, which in effect puts a floor under the market.
Such factors mean that although the sugar industry faces an annual supply surplus, prices are unlikely to fall any further.
Brazil is the world’s largest sugar exporter, accounting for over 40 per cent. It has an "ethanol parity" in the region – the price level at which it becomes more profitable for Brazilian producers to turn their sugarcane into ethanol.
This provides support and increases demand for the sugar market.
The ethanol parity is at about 17 cents a pound, and with the Brazilian government widely expected to increase the amount of ethanol mixed into petrol from 20 per cent to 25 per cent next year, the concurrent demand will soon offset supply.
Furthermore, let’s not forget that Brazil is to host the next World Cup and summer Olympics, both of which require a lot of fuel. Bio-ethanol demand will undoubtedly pick up, again supporting the short-term case for sugar.
Market analysts are currently speculating a rise in sugar futures, which gives longer-term support to the market as well.
Demand for sugar in developing countries is forecast to rise as their economies grow, with most experts predicting that world sugar consumption should grow by 2 to 3 per cent a year up to 2020.
This should begin to reverse the supply-demand imbalance and cause prices to rise as a result.
The research certainly makes good reading for sugar investors. ETFs tracking the price of this commodity are both a liquid and cost-effective way to get involved.
The $10.4m ETFS Leveraged Sugar product has a total expense ratio (TER) of 0.98 per cent.
Harpreet Sajjan is head of portfolio management at Platinum Financial Services. The views expressed here are his own.