2021 Forward Pricing Update
MSF has filled 2021 grower forward pricing orders at and slightly above $450 per Metric Tonne actual on multiple occasions recently, 22nd, 23rd and 26th of February.
It seems that given the improving macroeconomic environment (Covid vaccine, global economic recovery) that ICE11 futures values will continue to improve, however, so too will the AUD it seems. Will the improvement in the ICE11 be enough to outrun a resurgent Aussie dollar and see 2021 prices extend beyond $450?
Pool Price Update
- Raw sugar continues its new year march higher with the spot contract peaking at 18.94 cents per pound on the 22nd of February. There are multiple factors combining to support raw sugar.
- Supply Tightness: there is generally good demand for both raw and white sugar with less supply available than usual. Thailand is in the middle of its harvest and would usually be supplying ample sugar to the market. That is not the case this year with a dismal crop of 65-70 million tonnes of cane limiting sugar output.
- Compounding tightness issues in the white sugar market (and other commodity markets) is an on-going global shortage of shipping containers (a lot of white sugar is shipped bagged in containers). The core issue is that China, which has recovered faster from Covid-19, has revved up its exports and is paying huge premiums for shipping containers. Indian sugar freight costs to Sri Lanka for example have reportedly increased from USD250 per container to USD1,000 from Jan 2020 to Jan 2021.
- Due in part to increased competition for shipping containers, port congestion and loss of trade with Iran, India is expected to export 20%-25% less sugar compared to last year.
- Oil Prices: both major oil contracts (Brent crude and West Texas Intermediate crude) have surged some 30% through 2021 to both be above USD60 per barrel, higher than pre-Covid levels! The reason behind the surge is sustained production cuts by OPEC+ (the cartel of producers including Saudi Arabia, Russia, Iraq, UAE etc). This group of oil producers controls almost 50% of global production and made huge production cuts in the wake of the coronavirus outbreak as oil demand plummeted. More recently oil production was slowed in Texas due to the recent ‘deep freeze’.
- Already some members of the OPEC+ cartel are beginning to ramp up production in response to higher prices, Saudi Arabia’s cuts are expected to last into March at least. As vaccines roll out and oil demand improves its likely production will increase, stabilising oil prices. In saying that OPEC+ have a history of delaying output increases which have seen oil prices skyrocket in the past! Think back to 2013/14 and 2017/18 when Brent crude cracked $110 per barrel and $80/b respectively.
- Optimism in Commodities: commodities are back in favour. Many market analysts expect to see further gains in energy, metals and agricultural commodities due to easy monetary and fiscal policy, a weak US dollar and stronger inflation. Commodities are at their highest in 8 years with everything from oil and natural gas to copper and coffee on the up – commodities are generally regarded as a good hedge against inflation.
- Hindering Aussie dollar sugar value improvement is AUD Strength: the AUD is a commodity currency and as such has surged in line with commodities. Many banks/analysts see the AUD/USD exchange rate testing 0.80 soon before pushing on to the 2018 high of just above 0.81.
- Where to from here? The March-21 ICE11 sugar futures contract expires on the 1st of March. A large delivery of raw sugar against this contract expiry would somewhat dispel the above theory of supply tightness and probably stabilise or reverse sugar price improvement. A relatively small delivery ‘to the tape’ would likely fuel further bullishness.