Sugar is ending 2018 on a bitter note on signs that a price collapse could get even worse next year.
Futures have slumped 16 percent this year, a second straight annual loss, as booming global production sparked a supply glut. The one thing that kept the rout from being even deeper: robust demand for ethanol in Brazil, the world's biggest sugar grower and exporter. But now that backstop looks like it's going away.
Cane millers can turn crops into either sweetener or biofuel. For a lot of 2018, high gasoline prices meant Brazilian processors favored making ethanol, helping to cap the sugar glut. The recent plunge for crude oil is signaling that trend is about to reverse.
Most drivers in Brazil own flex-fuel cars that can run on either gasoline or ethanol. Traditionally, consumers choose the alternative fuel when it's below 70 percent of the price of gasoline because it yields less energy per liter. Now that crude oil is tumbling, the outlook for traditional fuel consumption is improving, and ethanol prices are slumping as a result.
In 2019, cane millers stand to make as much as 13 percent more by turning the crop into sweetener instead of biofuel, according to data from consulting firm FGA, based in Ribeirao Preto, Sao Paulo state. That compares with a sugar discount of as much as 30 percent this year.
At projected levels for premiums, prices will likely be attractive enough to spur millers to produce an additional 2 million metric tons of sugar in the 2019-20 season that starts in April, Willian Hernandes, a partner at FGA, said in a telephone interview. His forecast is for producers in Brazil's Center-South, the top region for output. Meanwhile, Marex Spectron sees the Center-South producing 28.8 million tons in the coming season, a jump of 2.3 million tons. The maximum potential for additional output would be 10 millions tons.
The outlook for bigger Brazil production will likely continue sugar's slump from this year. Futures touched a 10-year low of 9.91 cents a pound in August amid the outlook for a record surplus supported by bumper crops from the European Union to Thailand. The market saw a brief respite amid questions over the size of India's exports and as ethanol demand boomed in Brazil. Then oil started its decline, cutting the outlook for biofuel and dragging sugar down with it.
There are still looming questions for sugar in 2019. Currency fluctuations could spark volatility as declines for Brazil's real make exporters more eager to sell shipments that are priced in dollars.