Article: Identifying Covid-19 misinformation in the sugar market

Read below an article taken from our International Sugar Journal platform dated 22/03/20.

Local sugar industries are not immune to Covid-19 from spillover impacts and have begun to be impacted by a variety of problems emanating from logistics to stalling supply chains. Mercifully, the sugar industry is unlike the relatively perishable service industries (air travel, hospitality and tourism). Nonetheless, "the ecosystems in which companies operate mean that disruption to one industry or set of activities ripples to others"1. Doubtless, under the circumstances, it is imperative that best information is sourced so an informed decision is possible. But where this is in short supply, invariably, opportunism thrives from speculation - muddying waters.

Czarnikow piece: speculation

The classic example of this is the recent Czarnikow piece2 suggesting that the pandemic will result in global sugar consumption decreasing in the current 2019/20 season by 2 million tonnes. The 253 words piece is light on facts and heavy on speculative reasoning bereft of any in-depth analysis. In all fairness, the trader points out that their estimate is "a best-guess at this stage and are not wholly scientific" and "further modifications may be required as we learn more information". But this does not stop it from concluding that "overall consumption in the 2019/20 season will hardly increase."

The central thesis is that the consumption decline "is due to the collapse in out-of-home food and drink consumption, and the difficulties faced in operating normal supply chains." It is bit far fetched to suggest that with closures of restaurants/bars in many countries that sugar consumption will take a hit - as if the people deprived of the custom will starve rather than replenish themselves from alternative source/s.

Yes, the supply chains have been hit by the crisis. Recent press reports3 from China note difficulties in transporting and distributing sugar from factories. But this does not entirely mean sugar consumption has been adversely impacted. Another recent press report4 from Myanmar suggests that recently 50,000 tonnes of sugar was smuggled into China in response to the rise in local demand. What is astonishing is that Reuters ran a newspiece5 based on the sketchy note by Czarnikow, and subsequently re-reported by other news media.

Czarnikow piece: reflection

Only time and rigorous analysis will tell the relative impact of the coronavirus on both sugar production and consumption. As the press report3 from China points out, the difficulty in securing agricultural inputs in advance of the commencement of the planting season will result in sugar crops acreage decreasing. Indeed, analysis of the impact on production has been sparse.

As far as the sugar industry is concerned, the bigger elephant in the room is the price of crude oil tumbling to US$30/barrel on 8th March 2020 following an oil price war between Russia and Saudi Arabia. In a note, the investment bank Goldman Sachs said that in Q2 2020, this may further fall to US$20/barrel exacerbated by the Covid-19 pandemic. The consequence of this is that millers in Brazil are going to divert more cane to sugar production with ethanol becoming less competitive with gasoline. Press reports suggest that sugar production may increase by up to 6 million tonnes if not more when the 2020/21 campaign begins in April. This suggests that this year's (2019/20) rise in sugar prices will be short-lived. Add to this, the fall in the value of the Brazilian real against the US dollar. The Brazilian real depreciated from 4.03 at the turn of the year to 4.79 on 13th March. A weaker real against the dollar means that raw sugar, priced in dollars, becomes more attractive to producers than hydrous ethanol in the domestic market.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.