By Glenn Ashton · 20 Aug 2009
Sugar is currently trading near record highs, at levels not seen for around 28 years. Industry commentators cite predicted low monsoon rainfalls affecting the Indian crop and shortages from Brazilian producers, coupled to technical trading positions as the ostensible causes.
A major cause for the price spike is being overlooked. This is the increasing profitability of ethanol production from sugar cane and the pressure this is exerting upon international sugar markets.
Ethanol is globally promoted as a substitute for fossil-sourced automotive fuels. Brazil is currently the world’s biggest producer of ethanol from sugar cane. A massive push for ethanol production in the US by the Bush administration has resulted in a tripling of ethanol production there since 2003, with the US eclipsing Brazil in ethanol production in 2006.
US ethanol is mainly made from maize, not sugar cane. The exponential shift of significant volumes of food commodities towards fuel production was directly implicated as a key trigger for recent food inflation.
Although sugar is not a key dietary source, the lessons learned regarding the unintended consequences of the diverting nearly 20% of the US maize crop into ethanol seems to have entirely escaped both the sugar industry and its commentators.
Recent decades have seen sufficient sugar delivered into the international market. Now Brazil, the world’s biggest producer of sugar - and of ethanol from sugar cane – has sharply increased its ethanol exports to the US over the past three years. This trend will continue to place significant pressure on the sugar component of the Brazilian market.
Compounding this is increased building and upgrading of ethanol from sugar plants internationally, in attempts to localise fuel production. From Jamaica to Indonesia, Australia to South Africa and many places between, the lure of ethanol from sugar has spurred investment.
Add to this the spectre of speculation. Just as food and other commodity prices are driven by speculation, so it goes with sugar prices – as sugar cane ethanol becomes more profitable, sugar prices will inevitably rise.
While climatic influences, production pressures and so forth may have some influence on rising prices, the reality is that as the oil price rises, it becomes ever more profitable and attractive to use agricultural resources, such as sugar, that can compete with fossil fuels.
The increasing use of arable land for fuel production disrupts food production and accelerates environmental destruction of limited natural resources. Biofuels sourced from food sources have been proven to be detrimental to global food security. Biofuels from other agricultural sources continue to carry negative environmental and economic risks and predominantly impact the most marginalised sectors of society.
It appears that industry commentators and market pundits have learned little from recent events. Surely it is common sense - and a fundamental economic fact - that if a major component of our modern economy can be produced at a competitive price, it will inevitably attract investment and consume raw materials?
So it goes with sugar and ethanol production. You still want to know why the price of sugar is going up? Duh.