SAO PAULO • Sugar is ending 2018 on a bitter note, with signs that a price collapse could get even worse next year.
Futures have slumped 17 per cent this year, a second straight annual loss, as booming global output sparked a supply glut.
One factor kept the rout from being even deeper: robust demand for ethanol in Brazil, the world's biggest sugar grower and exporter. But now, that backstop looks like it is going away.
Cane millers can turn crops into either sweetener or biofuel.
For much of this year, high petrol prices meant Brazilian processors favoured ethanol, helping to cap the sugar glut. The recent plunge for crude oil is signalling that trend is about to reverse.
Most drivers in Brazil own flex-fuel cars that can run on either petrol or ethanol.
Traditionally, consumers choose the alternative fuel when it is below 70 per cent of the price of petrol because it yields less energy per litre. Now that oil is tumbling, the outlook for traditional fuel consumption is improving, and ethanol prices are slumping as a result.
Next year, cane millers stand to make as much as 13 per cent more by turning the crop into sweetener instead of biofuel, according to Brazilian consultants FGA. That compares with a sugar discount of up to 30 per cent this year.
Estimates suggest prices will likely be attractive enough to spur millers to produce an additional two million tonnes of sugar in the 2019-2020 season that starts in April, said FGA partner Willian Hernandes.
Meanwhile, brokerage Marex Spectron sees the Centre-South producing 28.8 million tonnes next season, a jump of 2.3 million tonnes. The additional output could even hit 10 million tonnes.
The outlook for bigger Brazil production will likely continue sugar's slump from this year.
Futures touched a 10-year low of 9.91 US cents a pound in August amid the outlook for a record surplus supported by bumper crops from the European Union to Thailand.
The market saw a brief respite amid questions over the size of India's exports and as ethanol demand boomed in Brazil. Then oil started its decline, cutting the outlook for biofuel and dragging sugar down with it.
Questions still loom for sugar next year. Currency fluctuations could spark volatility as declines for Brazil's real make exporters keener to sell shipments that are priced in US dollars.
Sugar output in India, the second-biggest producer, could be hurt as yields in some areas are looking like they will shrink, according to an analyst at Marex Spectron in London.
Low sugar prices in the EU may trigger beet farmers to shift to more profitable wheat crops.