2006

Sugar flies

We recently see articles on newspapers talking about sugar, even Warren Buffett has some words on sugar in his annual meeting of Bershire Hathaway.  It is because of that, since 2002, sugar has been rising from $5cents to $19.75cents during March of 2006.  We’ll look at why it rises so high, whether it’ll keep rising, and when is it going to finish this upward trend.  Thus, we can set up strategies to profit from it.

Some basics of raw sugar is needed to discuss first before we go forward.  First of all, raw sugar comes from sugarcane and sugar beet. About 75% of raw sugar is produced by sugarcane and the rest is produced by sugar beet.  For sugar beet, it an annuals, that’s why the production trend is moving toward sugarcane.  Sugar beets can grow in colder and temperate climates, prefer a more equal distribution of rain than sugarcane, and can be stored for longer periods without deterioration.  Beets are planted in the spring and harvested in the fall.  It also has the advantage of harvesting with machines rather than hands.  For sugarcane, it is a perennials which is planted for 1 year and can be harvested for about 4 years.  But in some tropical areas like Hawaii, it could be harvested for 10 years or more without replanting.  It is now cultivating in hot, wet regions of the world located more or less between the Tropics of January and July.  Average producing cost of sugar is about $0.09 - $0.10 USD.  Due to the depreciation of USD, everything accounted with USD should be inflated the percentage USD depreciates.  Except for this factor of exchange rate, the following will have the factors affecting the supply and demand.

Reasons for sugar flies since 2002: Emerging markets, Brazil, Oil.  Firstly, due to globalization, (thanks for the money put into the Nasdaq in 2000 and the fall of it in 2001) world communication becomes so much easier and cheaper than ever before, International corporations develop their business in emerging markets, move their factories to China, move their service centres to India for lower cost.  In fact, not just the international corporations, even small to medium sized corporations are able to do that now too because of the popularity of Internet and PC.  Thus, all these lead to the global arbitrage business and the rise of the emerging markets especially China & India.  As we all know, Chinese & Indian are sugar lovers.  This leads to a bomb-rise in demand of sugar.    China has changed from an exporter to an importer of sugar since early 2000 and it’s going to import more during the next few years.  Let’s look at Table(1) for the numbers of consumption of sugar in China & India since 2000 to 2006. 

Table(1)

China’s sugar statistics from 2000 to 2006

Year	Total Import (1000MT)	Total supply (1000MT)	Raw export	Refined export	Total export (1000MT)	DomesticConsumption (1000 MT)
2000	687	10760	6	427	433	8476
2001	1083	9783	6	123	129	8650
2002	1375	10684	9	451	460	9355
2003	842	13091	10	110	120	10950
2004	1235	13990	10	57	67	11600
2005*	1400	13798	10	40	50	11800
2006*	1300	14158	10	40	50	12000

*estimated

India’s sugar statistics from 2000 to 2006

Year	Total Import (1000MT)	Total supply (1000MT)	Raw export	Refined export	Total export (1000MT)	DomesticConsumption (1000 MT)
2000	438	28031	0	25	25	17296
2001	0	31190	0	1360	1360	17845
2002	100	32560	0	1130	1130	19760
2003	10	33820	0	1410	1410	19980
2004	550	28160	0	250	250	18810
2005*	2000	24870	0	20	20	18800
2006*	1000	25390	0	20	20	19300

　

Then, look at the supply side of sugar.  Brazil is the largest exporter of sugar, 43% of the total world export of sugar in 2002-03.  Due to the rise of Oil price, Ethanol is in more demand.  Ethanol is an energy source which can be used as gasoline.  Obviously, when oil price keeps rising, Ethanol is in more demand.  Ethanol can be produced by sugar.  In this situation, sugar is rather taken to produce Ethanol than selling in the world market as raw sugar.  The Brazil government is taking more than half of the sugar produced to produce Ethanol.  In addition, in 2002, most of the sugar-makers quitted their business because of the low price of sugar which can’t even cover their costs.  Remember the 4-5 years cycle of sugarcane mentioned above?  2002 + 4/5 = 2006/2007.  Furthermore, a third of sugar beet producers quitted the business since 1996 according to the American Sugar Alliance. US & EU government subsidies are often the only incentive keeping American & European producers in the game.  About $5 billion & $2 billion the US & EU pay out for it, respectively.  This makes the overproduction and depressed international sugar prices. Meanwhile, there is no more cheap oil as everyone knows.  Oil price keeps rising, Brazil’s export of raw sugar keeps decreasing.  The consequence will be shortage in supply. 

A little bit more about Ethanol, since Brazil has been the world’s largest producer and exporter of raw sugar, they know they’ll push prices down and ultimately hamper the nation’s sugar producers with high storage and shipping costs.  In response, the Brazilian government simply increases the amount of sugarcane diverted into ethanol production.  With the control of diverting percent of its annual sugarcane crop into ethanol, it is able to keep the sugar price stable for the last 19 years.   With oil so cheap for years, ethanol can’t sell at good price.  Along with the depreciation of Brazilian money by a third in 1999, people don’t want to sell the sugar as ethanol because they could earn foreign currency if they sell them as raw sugar.  But the fundamental changes are here, rise of China & India, rise of oil price, and the depreciation of USD. The control over ethanol production and distribution is ceded by the Brazilian government to Brasil Alcool S.A. which is managed by the Brazilian producers who, unlike the government, manages to maximum profit rather than stabilizing prices.

What will it be when demand increases and supply decreases?  There’ll only be one situation, that is, the rise of price and we’ve been seeing it since 2002.  The problem here is whether it’ll keep rising or not?  If it keeps rising, when will it end?  We’re going to discuss about it right now.

 

 

Please first look at the price movement at pic(1).  We see it rises from less than $6 to $19.75 in less than 2 years.  It has been going back down to the current price of $15.05.  There is a little bit more we need to know before we go forward.  Except for sugar, corn & soybean could produce oil as well.  Therefore, if the price of sugar is too high, it is going to be substituted by corn and soybean.  Then, you may ask why don’t we buy corn & soybean?  Supply and demand!  If we compare the supply & demand of sugar with that of corn & soybean, we believe that sugar will rise the most among these 3 commodities.  In addition, Only 25% of the sugar is put on the world market to trade, so sugar price movement is leveraged 4 times.  There are a few questions below which provide us the conclusion of whether sugar’s price will keep on going up or not:

-will oil price keep going up?

-will China & India keep eating more & more sugar in the future?

-will Brazil and others keep taking the sugar produced to produce Ethanol?

I’m quite sure about all these three questions are yes until the end of 2006.  But if the price of sugar goes too high, even though the fundamentals still look good, the price will still fall back down although it’ll just be a retrace.  So, the conclusion is that it’ll keep rising still, at least until end of 2006.

How high will sugar rise to, you may ask?  I don’t know.  But the highest in history is $66.5cents from $1.4cents, yes, $66.5cents from $1.4cents and it was in 1974 November and if you count in the depreciation of USD since then, the sugar price may just sky-rocket.  There’s another sky-high record in 1980/1981, the price wasn’t as high, it was $45cents from $6cents and by then USD was appreciated.

There maybe a bubble in Ethanol stocks right now but I don’t think it’s going to blow up yet and it may go higher before the fall.  Thus, people are likely to take sugar to produce Ethanol.

About when will this upward trend end?  Good question.  t’ll keep rising still, at least until end of 2006.  This is based on the seasonal factor of sugar.  Brazil is going to finish harvesting in October and then China, US, & Mexico start harvesting in November.  For more information about this, please check my “Crop Production Calendar” and “Sugar stats 1960-2006”.

Using the ratios and numbers of ‘consumption/end stock’, ‘ending stock/production’, ‘ending stock minus beg stock’, and ‘supply minus consumption’ (In “Sugar stats 1960-2006”) as indicators and compare these of 1971-75, 1978-81, and 1986-90 with 2003-2006.  We see that these numbers have yet hit the dangerous zone thus, it has not hit the highest point yet. In addition, Brazil has negative stock in 2006 and its harvest season is from May to October, thus there is very good factors to say that the highest point happens in end of 2006 or early 2007. The raw export and raw import are very tight in 2006, only 312000MT surplus while it’s 1172000MT in 2005. Europe’s harvest season is from September to January and its production supply is going to decrease from 15.11% to 11.04% during 2006/2007and more importantly, its refined export is going to reduce to 8.1067% from 31.7923%.  Therefore, it is believed that a high flier of sugar in the end of 2006 or early 2007. Australia’s raw export is reduced from 15.87% to 13.49% and its harvest season is from July till January.  (Detailed information is in “sugar stats 2002-2007 countries compare”)  Combine all these information, my prediction is price of sugar will keep falling until August, then Brazil and Australia don’t have enough supply for the market  and then a high flier of sugar starts until end of 2006 or early 2007.

How high will sugar rise to, you may ask?  I don’t know.  But the highest in history is $66.5cents from $1.4cents, yes, $66.5cents from $1.4cents and it was in 1974 November and if you count in the depre Wave Principle plus the help of fundamentals to eliminate possible countings.  In pic(2), I provide my current counting of the price movement of sugar. 

 

 

 

 

Lastly, good trading strategy & skill are needed if you’re trading on huge margin and with derivatives.  “Back spread” is suggested to use since we’re looking for a huge blow up.  “back spread” is an option strategy of longing a call option at lower strike price while shorting another call option at higher strike price for the same period of options, say March 2007.  It’s good to also buy a August or September of October put option for hedging with the long position. Options with closer strike price to the current price and further exercise period are suggested.  If futures is your choice, then a suggestion of not buying on huge margin or some hedging positions like longing a put option is given.  Last suggestion, set your trade strategy for every situation and after you set your position, don’t be affected by the market movements, just stick with your pre-set strategy to trade, at least you won’t regret no matter you win or lose.  Good luck to your trade.

　

Sugar Crop Production Calendar

Sugar beet

January

February

March

April

May

June

July

August

September

October

November

December

Europe

Harvesting(Spain)

Planting

Planting

Planting(Germany)

Harvesting(France, Germany)

Harvesting

Harvesting

Harvesting

Former Soviet Union

Planting

Planting

Vegetative

Filling

Mostly Filling

Harvesting

Sugarcane

January

February

March

April

May

June

July

August

September

October

November

December

Australia

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

Brazil

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

China

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

Mexico

Harvesting

Harvesting

Harvesting

Harvesting

Planting

Harvesting

Harvesting

US(FL)

Harvesting

Harvesting

Harvesting

Harvesting

Harvesting

　

Sugar stats world Total summary

World	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007
Sugar; Centrifugal
World Total Summary
Beginning Stocks  (1000 MT)	36790	40369	38382	34165	30973
Beet Sugar Production (1000 MT)	36916	34540	36832	37526	32686
Cane Sugar Productio (1000 MT)	111500	107869	103844	107046	116517
TOTAL Sugar Production (1000 MT)	148416	142409	140676	144572	149201
Raw Imports    (1000 MT)	23656	24330	25975	25879	24908
Refined Imp.(Raw Val)   (1000 MT)	13074	13304	14534	14116	13691
TOTAL Imports (1000 MT)	41534	42112	45157	44914	43501
TOTAL SUPPLY   (1000 MT)	226740	224890	224215	223651	223675
Raw Exports  (1000 MT)	25080	25635	27147	26191	27800
Refined Exp.(Raw Val)  (1000 MT)	22360	21293	20604	22647	19231
TOTAL EXPORTS   (1000 MT)	47440	46928	47751	48838	47031
Human Dom. Consumption (1000 MT)	137882	138785	141466	142996	145021
Other Disappearance (1000 MT)	1049	795	832	659	805
Total Disappearance  (1000 MT)	138931	139580	142299	143840	145729
Ending Stocks  (1000 MT)	40369	38382	34165	30973	30915
TOTAL DISTRIBUTION  (1000 MT)	226740	224890	224215	223651	223675
End. Stock/total disappearance	0.29057	0.27498	0.24009	0.21533	0.21214
Production-total disappearance	9485	2829	-1623	732	3472
End. Stock-Beg. Stock	3579	-1987	-4217	-3192	-58
Total diappearance/End. Stock	3.44153	3.6366	4.16505	4.64404	4.71386
Raw export-raw import	1424	1305	1172	312	2892
Total export-total import	5906	4816	2594	3924	3530

　

　

World	Australia	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	Brazil	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	China	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	EU-25	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	India	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	Mexico	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	Russian Federation	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	Thailand	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007	US	2002/2003	2003/2004	2004/2005	2005/2006	2006/2007
	Cane producer						Cane producer						Beet & Cane producer						Beet & cane producer but mostly Beet						Cane producer						Cane Producer						Beet producer						Cane producer						Beet & Cane producer
	8.27% exporter						40.72% exporter						2.53% importor						3.32% exporter												1.27% exporter						9.88% importor						8.29% exporter						3.78% importor
Beginning Stocks  (1000 MT)	13.49% raw exporter						51.8% exporter												6.42% raw importor												0.18% raw exporter						14.85% raw importor						6.4748% raw exporter						4.80% raw importor
Beet Sugar Production (1000 MT)														359.460%	184.710%	177.830%	239.830%	336.540%				5796.050%	5745.080%	4956.250%														428.000%	558.770%	610.880%	666.200%	780.150%								1096.540%	1232.480%	1135.700%	1059.530%	1304.530%
Cane Sugar Productio (1000 MT)														901.610%	935.950%	883.150%	812.730%	858.670%				0.289%	0.269%	0.236%		19.857%	14.045%	13.684%	18.983%	19.160%																				322.510%	332.810%	285.330%	258.300%	274.810%
TOTAL Sugar Production (1000 MT)		3.680%	3.636%	3.830%	3.664%	3.475%		16.043%	18.538%	20.000%	18.730%	20.335%		7.668%	7.537%	6.985%	6.640%	7.443%				15.389%	15.112%	11.042%		14.918%	10.638%	10.101%	14.055%	14.963%		3.523%	3.743%	4.371%	3.889%	3.787%		1.065%	1.355%	1.599%	1.729%	1.709%		4.909%	4.922%	3.687%	3.327%	4.156%		5.150%	5.510%	5.080%	4.663%	5.004%
Raw Imports    (1000 MT)														300.140%	433.760%	451.200%	405.730%	361.330%				695.670%	656.900%	642.360%														1564.090%	1335.800%	1385.950%	1391.090%	1485.470%								460.350%	458.690%	491.630%	785.970%	480.170%
Refined Imp.(Raw Val)   (1000 MT)														100.960%	153.340%	129.350%	247.950%	146.080%				510.530%	495.890%	365.200%														229.460%	315.690%	481.630%	425.050%	438.240%								361.020%	357.040%	432.090%	369.790%	331.600%
TOTAL Imports (1000 MT)														202.730%	293.270%	301.170%	311.710%	252.870%				564.480%	534.350%	482.750%														963.070%	871.490%	952.230%	935.120%	988.480%								377.760%	377.800%	421.860%	629.200%	378.380%
TOTAL SUPPLY   (1000 MT)		2.636%	2.601%	2.649%	2.526%	2.413%		10.594%	11.859%	13.025%	12.370%	13.524%		5.774%	6.221%	6.025%	5.704%	6.086%				1288.760%	1322.860%	1044.910%		1491.580%	1250.830%	1133.510%	1160.070%	1246.000%		285.080%	304.640%	341.370%	346.430%	340.850%		340.040%	295.700%	311.750%	325.510%	327.260%		364.510%	358.180%	285.530%	269.480%	320.870%		467.450%	487.040%	480.430%	481.730%	465.680%
Raw Exports  (1000 MT)		15.849%	15.670%	15.866%	15.868%	13.489%		39.833%	42.208%	49.987%	47.975%	51.799%																				0.048%	0.027%	0.033%	0.573%	0.180%								1064.190%	889.800%	606.700%	496.350%	647.480%
Refined Exp.(Raw Val)  (1000 MT)		0.622%	0.658%	0.680%	0.618%	0.728%		17.934%	20.758%	21.598%	19.429%	24.700%										2924.190%	3179.230%	810.670%								0.116%	0.033%	0.578%	1.916%	1.265%								1167.710%	1211.200%	712.480%	706.500%	1091.990%
TOTAL EXPORTS   (1000 MT)		8.672%	8.858%	9.313%	8.796%	8.271%		29.511%	32.475%	37.737%	34.737%	40.718%										1262.380%	1474.880%	332.120%								0.080%	0.030%	0.268%	1.196%	1.265%								1112.980%	1035.630%	652.340%	593.800%	829.240%
Human Dom. Consumption (1000 MT)		0.870%	0.829%	0.813%	0.804%	0.793%		7.071%	7.494%	7.493%	7.546%	7.551%		7.942%	8.358%	8.059%	7.832%	7.723%				1237.400%	1228.150%	1199.830%		1449.070%	1355.330%	1399.630%	1384.650%	1406.690%		3.697%	3.877%	3.675%	3.525%	3.545%		4.642%	4.395%	4.453%	4.685%	4.696%		1.407%	1.427%	1.463%	1.504%	1.552%		6.253%	6.326%	6.425%	6.313%	6.410%
Other Disappearance (1000 MT)
Total Disappearance  (1000 MT)		0.864%	0.824%	0.808%	0.800%	0.789%		7.018%	7.451%	7.449%	7.501%	7.514%		7.882%	8.311%	8.011%	7.786%	7.686%				1231.840%	1222.610%	1195.710%		1438.120%	1347.610%	1391.440%	1376.530%	1399.860%		3.766%	4.012%	3.852%	3.678%	3.699%		4.607%	4.370%	4.427%	4.658%	4.673%		1.396%	1.419%	1.455%	1.495%	1.544%		6.446%	6.427%	6.557%	6.473%	6.482%
Ending Stocks  (1000 MT)		1.640%	1.415%	1.004%	0.655%	1.155%		0.669%	2.684%	1.712%	-0.291%	0.485%		5.006%	6.052%	5.143%	4.543%	6.476%				1562.710%	1548.770%	1418.410%		3079.100%	2363.090%	1631.790%	1790.270%	1931.100%		2.958%	3.223%	5.986%	6.050%	5.298%		2.601%	1.146%	1.698%	1.518%	1.294%		2.589%	3.166%	3.562%	3.154%	3.322%		3.753%	4.484%	3.533%	4.210%	2.552%

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Roy   12th June 2006