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Article: Identifying Covid-19 misinformation in the sugar market
30 March 2020
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.