Commodities: Sugar - When Sweet Turns To Sour

The year 2012 was good to the connoisseurs of sweets. The price of sugar fell 18% year to date (boerse-go). But that is bad news for those unfortunate speculators who happened to bet on rising sugar prices. As many other agriculture products (soft commodities) sugar is traded as an asset on financial markets like stocks & bonds.

Now sugar costs around 40% less than at the all-time high from February 2011. What happened?

The price of sugar has been falling because there is a glut of the sweet substance, reports Bloomberg (bloomberg). Huge crops from Brazil, India and other leading producers countries meet a week global demand. According to the International Sugar Organization in the season 2012/13 the global sugar production (supply) will exceed the global sugar demand by 5,9 million tons (bloomberg). This would be more than the U.S. consumes in six months.

I reckon the current situation is a typically market response to a former bubble. Not long ago there was a massive speculation onto rising sugar prices. Since around 2000 it has been fashionable to invest into soft commodities like sugar, cocoa, cotton and others agriculture products. Analysts from banks, brokers and other pundits claimed that there is a "super-cycle" for commodities. We were told, that the rising wealth in China and other emerging markets will create a strong demand for sugar and many other agriculture products. These pundits claimed further the global sugar production should grow very slow. Therefore the demand for sugar would overgrow the supply, causing sharp rising prices. 

A lot of hedge funds and other speculators subscribed into the "super-cycle" theory and have been pumping billions of Dollars into the sugar and other commodity markets. Others jumped onto the bandwagon and bought sugar and other agriculture products just because their price was climbing in the hope the price rise will continue. The herding behavior of the sugar speculation created a price rally which peaked in February 2011.

As usual high & rising sugar prices caused strong backlashes. Sugar easily can be submitted by other sweeteners. Therefore the sugar rally reduced the demand for the sweet substance. And the farmers did what they always do when prices for their products are climbing: They planted more sugar which causes now the rising sugar production. These forces caused the sugar bubble to implode.

The falling sugar price is another proof that the claimed "super-cycle" for commodities like sugar doesn´t exist. The supporter of the "super-cycle" theory are ignoring basic economic facts, like the strong demand & supply reactions to rising prices.