Sweet Run for Sugar Prices

Sugar Joins List of Commodities Making Multi-Year Highs in 2021

Jake Hanley, Managing Director/Portfolio Manager                                                  August 18, 2021

Since bottoming in April of 2020, sugar prices have run up 119%.[1] Prices are now back to levels not seen since 2017. The storyline, as has been the case among commodities in 2021, is all about supply and demand.

Brazilian Production Woes

South American cane production has taken a hit this year due to adverse weather conditions including drought and early frosts. Brazil, the largest global sugar exporter, has seen production estimates drop by approximately 15% since the beginning of the growing season.[2]

Robust Demand

Brazilian production declines are coinciding with strong demand which continues to grow on the heels of the global pandemic. Chinese imports, for example, are up 58.3% year-to-date.[3] While sugar’s primary global use is for human consumption, it is also used to produce ethanol which is blended with gasoline for fuel. The rebound in ethanol demand, commensurate with the re-opening of the global economy, is also contributing to sugar demand.

This chart is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.

For this purpose, sugar commodity values are representative of the futures (generic first sugar futures contract - <SB 1 Comdty>) spot continuation chart as defined by and sourced on Bloomberg: Generic contracts, such as SB 1, SB 2, SB 3, ..., are constructed by pasting together "rolling" contracts, according to the pre-selected roll types on the commodity default page. The generic contract uses the value of a particular contract month until it "rolls" to the next month in the series. You can access a generic contract by replacing the month/year code with the number 1, i.e. SB 1<CMDTY>. Replacing the month/year code with the number 1 will yield the spot contract.

Tightening Balance Sheet

Taken together, supplies are tightening relative to demand. The latest figures from the USDA show global ending stocks[4] at a three-year low. We believe it is likely that the USDA revises estimates even lower as Brazilian production issues are fully realized.

How High Can Prices Go?

Referencing the front-month sugar futures contract (see quarterly chart below) the all-time high price of 66 Cents was reached in 1974. 36.08 Cents is the highest price reached in the past 20 years. Note however that going back to 1961 it is rare for prices to trade above 20 cents. In 2016 prices touched 23.90 cents, and it is possible that the current rally advances to challenge that level. 

Further price appreciation depends on the evolving supply and demand dynamic. Current USDA estimates reveal a global sugar supply that is tighter relative to demand than was the case in 2016. We believe that it could be supportive for prices if current production and usage estimates are realized. 

This chart is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.

For this purpose, sugar commodity values are representative of the futures (generic first sugar futures contract - <SB 1 Comdty>) spot continuation chart as defined by and sourced on Bloomberg: Generic contracts, such as SB 1, SB 2, SB 3, ..., are constructed by pasting together "rolling" contracts, according to the pre-selected roll types on the commodity default page. The generic contract uses the value of a particular contract month until it "rolls" to the next month in the series. You can access a generic contract by replacing the month/year code with the number 1, i.e. SB 1<CMDTY>. Replacing the month/year code with the number 1 will yield the spot contract.

Downside Risks

While we anticipate that the fundamentals and current supply/demand estimates will continue to be supportive for sugar prices, there is the risk that prices will head lower. For one, there is an issue with shipping costs. Elevated freight rates require consumers to “pay up” for imported sugar. The risk is that some demand may become priced out of the market, putting pressure on sugar prices. 

Additionally, the recent price advance unfolded rather quickly. It is likely that some market participants will be looking to take profits sooner rather than later. 

Considering CANE

Investors can obtain price exposure to sugar futures in their brokerage account through the Teucrium Sugar Fund, ticker CANE. Like our grain ETFs, CANE is passively managed and diversified among the futures curve holding three different contracts in accordance with the benchmark. You can view our holdings here: https://teucrium.com/holdings/cane. 

While 2021 has been a good year for sugar prices, it has also been a good year for the Teucrium Sugar Fund. As of July 31^st CANE recorded a record number of shares outstanding. Average trade volumes are rising as well as investors are increasingly turning to alternatives in general, and commodities in particular, amid historic levels of money printing and fiscal stimulus. 

 Looking for Broader Diversification?

The Teucrium Agricultural Fund, ticker TAGS, holds all four of Teucrium’s single-commodity ETFs in equal weight. Some investors are not interested in picking one commodity over another but rather prefer exposure to agriculture prices in general. Given the fund is diversified among four different agricultural markets, TAGS is historically less volatile than any one of our single-commodity funds. For example, year-to-date CANE is up 41.33%, CORN is up 33.92%, WEAT is up 17.76%, and SOYB is up 19.45%, and TAGS is up 27.61%. 

Past performance does not guarantee future results. Percentage returns based on the specified fund’s “Net Asset Value,” or NAV as according to Bloomberg Finance L.P. for the time period 12/31/2020 – 08/18/2021. Data sourced on 08/18/2021. Please read the funds’ prospectuses carefully before deciding to invest in Teucrium Funds. Prospectuses can be found here: www.teucrium.com

Teucrium’s ETFs may be held as a core component of a portfolio’s overall commodity exposure.

Options are available on CORN, WEAT, SOYB, and CANE. Please contact your broker and/or financial advisor for more information. 

[1] Based off of front-month sugar futures prices from 04/27/2020 – 08/18/2021

[2] https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery

 https://www.reuters.com/article/brazil-sugar-crops/update-1-brazils-sugar-output-revised-down-as-dry-weather-persists-report-idUSL2N2OB1PP

[3] Michael McDougall – PGM Global View Sugar Report 08-18-2021

[4] Ending Stocks (also called carry-out): The amount of sugar that will be available at the end of the crop year, given the estimated or actual beginning stocks (starting inventory), production, and usage.