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Unfavorable Weather Forecasts in Chinese Sugarcane Belt Boosts Sugar Prices

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Nov. 20 2020, Updated 11:45 a.m. ET

Why sugar prices are going up

On January 21, 2016, sugar no. 11 futures contracts for March delivery rose by 1.9% on the Intercontinental Exchange, ending the day at $14.45 per pound. Sugar prices climbed due to the speculation of unfavorable weather condition in Chinese Sugar Belt. Notably, the iPath Dow Jones-UBS Sugar Subindex Total Return Service Mark ETN (SGG) rose by nearly 2.3% on January 21, following sugar’s trend.

However, MDA Weather Services have reported that the northeastern region of China’s southern Sugarcane Belt is expected to face unfavorable weather conditions. During the week ending January 24, 2016, sugar could experience cold, even near freezing temperatures. This would, of course, threaten the sugarcane crop with frostbite and would likely hurt sugar output dramatically.

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When it rains, it pours (on sugar)

In other regions, forecasts show 300% higher-than-average rain projections. Too much rain would hinder field harvesting activity during the week ending January 30, and these expectations negatively impacted supply and output sentiments on January 21. For this reason, raw sugar futures prices advanced so sharply on the day, given fears of lower output to come.

Lower output sentiments from India also supported the price gain for sugar on January 21. Unfavorable weather conditions during the development of sugarcane have caused analysts to project that declines in output will  hamper sugar exports significantly in the coming weeks. When asked if India would be able to satisfy domestic requirements, Indian Foods Minister Ram Vilas Paswan replied that sugar output would, in fact, be sufficient for meeting India’s domestic demand. But speculations of lower exports still supported the boost in sugar futures prices on January 21.

What this has meant for related stocks

This rise in sugar prices supports businesses engaged in sugar-producing while negatively impacting companies in the food business. Prices of Hershey Company (HSY), General Mills (GIS), Cosan (CZZ), and Campbell Soup Company (CPB), for example, declined by 0.39%, 0.81%, 0.37%, and 0.02%, respectively, on January 21, 2016. The iPath MSCI India Index ETN (INP) dropped by 0.64% on January 21, 2016.

For more analysis, check out Market Realist’s Consumer Staples page.

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