PROMPT sugar prices globally have hit their lowest levels in two years on the back of concerns regarding oversupply and falling fuel prices, which make sugar-based ethanol uneconomical at current values.
Commonwealth Bank commodity analyst Tobin Gorey said the market was factoring in a production surplus of a couple of million tonnes globally this year.
“Prices have fallen quite sharply from last year and that is mainly on the back of increased production.”
Another focus according to Mr Gorey was the political uncertainty in Brazil, the world’s largest sugar producer.
“The political situation is the wildcard, we saw the Brazilian real drop markedly in value following the revelations from (anti-corruption investigation) Operation Carwash, but it has since made up around half of those losses.
“It is difficult to monitor what is happening on that front, but generally it seems like people are satisfied that although there is unrest it is not going to plunge Brazil into chaos, it is still a functioning democracy.”
Sugar futures prices plunged on Friday, with near contracts faring worse, with losses on 2017 contracts averaging losses of around 3 per cent.
The New York July contract has hit its contract low, with price at US15.02 cents a pound on Monday.
Mr Gorey said falls were lower on longer term contracts but added they were still significant.
He said Brazilian fuel giant Petrobras had started the rot with its decision to cut its gasoline prices by 5pc.
“The drop in prices lowers the price point at which sugar can leak into ethanol,” Mr Gorey said.
“That price point is already below 13½¢ so if the market does need to lose some sugar, prices will need to fall some more,” he said.
Mr Gorey said there was further bearish news late last week with a report that southern Brazilian sugar mills crushed more cane and allocated more of that to sugar than most analysts were expecting. Weather forecasters are also suggesting good crushing weather for the next couple of weeks as well, which continues to create further downside risk for the sugar market.