Sugar delivering more energy

Written by Stephen Poloz

Sugar prices have gone through the roof in the past year, to a 25-year high, just like a lot of other commodities. Is this just a coincidence, or is there some connection between the prices of such diverse products as oil, copper and sugar?

In the cases of oil and copper, many analysts have pointed to rising demand in China as the main driving force. The rampant electrification of China is seeing the deployment of huge quantities of copper wire, and the rising use of automobiles and motorcycles is ramping up the demand for imported oil. Fair enough, but China is not the whole story in either market. Besides, when it comes to sugar, China produces most of its own needs, importing a bit more than one million tonnes per year while producing more than 10 million tonnes.

Yet there is a connection, at least between the price of oil and the price of sugar. Fact is, the two are substitutes for one another, because sugar cane can be used to produce ethanol.

In the middle of this story is Brazil, the world’s largest producer and exporter of sugar. Brazil accounts for 20% of global sugar production, and nearly 40% of global exports. Accordingly, Brazil has the weight to swing the market.

Back in the 1970s, during the first oil crises, Brazil introduced a program to encourage the use of ethanol as an automobile fuel in order to reduce its dependence on imported oil. Today, close to half of the vehicles sold in Brazil are flex-fuel, able to run on either gasoline or ethanol. Drivers alternate between them depending on price. Some 40% of the stock of Brazilian cars can run on pure ethanol. Naturally, with oil and gasoline prices so high, Brazilian drivers are using more ethanol. Upstream, close to half of Brazil’s production of sugar usually goes into ethanol production, and that figure is going up, putting extra demand on the global sugar market.

Meanwhile, sugar production is down in Thailand, once the world’s second largest exporter, because of a continuing drought, which is adding to sugar market tightness. And overall consumer demand continues to grow strongly in places like India and China, as household purchasing power rises. The stars are aligned for high prices of sugar.

Which countries are most affected? The top five importing countries, accounting for nearly one-third of global imports, are Russia, Indonesia, Korea, Japan and Canada. This will be one more reason for consumer prices to go up in Canada. However, once again, it will be in what economists regard as a volatile category — food — that can typically leave the underlying trend in inflation unaffected. Consumers may see the greatest impact in cereal prices, the most important destination for sugar, and of course candy products.

The bottom line? The recent increase in sugar prices is only one small element in a complex mosaic, but one in which new inflation risks keep popping up. And, it is a good reminder of just how interconnected global markets are becoming.

February 9, 2006

The views expressed here are those of the author, and not necessarily of Export Development Canada.

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