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What You May Not Know about Cheap Oil: It’s Supporting Brazilian Sugar Exports

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Jan. 26 2016, Updated 2:57 p.m. ET

Sugar prices and futures contracts fell on January 25

Sugar No. 11 futures contracts on the Intercontinental Exchange for March delivery shrank by 2.2% and settled at $14.1 per pound on January 25, 2016. Sugar prices decreased due to increased supply sentiments from Brazil due to cheaper freights. Meanwhile, one notable ETN (exchange-traded notes), the iPath Bloomberg UBS Sugar Subindex Total Return Service Mark ETN (SGG), fell by 2.1% on January 25, 2016.

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Brazilian sugar prices and the cost of ocean freight

But the significant decline in oil prices has supported Brazilian sugar exports, according to the Capea, the research arm of the University of Sao Paulo, on January 25, 2016. Brazilian sugar exports make up a significant cost of its ocean freight, and with the reduction in oil prices, ocean freight has declined sizably. Still, the decline supported Brazilian sugar competitiveness in the exports market while supporting prices. It also helped reduce US sugar futures prices on January 25, 2016, as sugar would be easily available at cheaper rates.

Sugar production projections in the EU

Rabobank International released its report on the European Union’s sugar production projections until 2020. The report highlighted that the long-term projections for sugar production in the European Union are favorable. The European Union is focusing on being a net sugar exporter. Average yearly output in the EU would rise to approximately 20 million metric tons after the quota system ends in 2017.

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The projection from the bank expects the raw sugar imports to be reduced to 1.5 million tons per year compared to 3.2 million tons of average during 2010-14, and white sugar imports would be restricted to 0.5 million tons per year from 1.1 million tons per year during 2010–14. Sugar exports could then rise to 3.9 from 1.8 million tons per year compared to 2010–14.

While there are anticipations of increase in isoglucose usage that could reduce sugar consumption, the threat of competition within the EU could emerge in case production increases significantly. Higher competition in raw sugar markets would then support US imports with competitive pricing. It supported futures prices on January 25, 2016.

What low sugar prices has meant for sugar-reliant food companies

That said, the decline in sugar prices negatively affects companies engaged in the sugar production businesses, even though it tends to support companies in food businesses who rely on sugar as an essential ingredient. Shares of General Mills (GIS), Hershey Company (HSY), Cosan (CZZ), and Campbell Soup Company (CPB) dropped by 0.98%, 1.7%, 4.3%, and 0.05% on January 25, 2016. Notably, the iShares MSCI Brazil Index (EWZ) declined by 2.5% on January 25, 2016, with the decrease in sugar prices.

Now let’s look at the larger trend developing in sugar as of January 25, 2016.

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