• What happened?

We published a report last August – “The holy cow!” - on the drought situation in Thailand. Our forecasts have played out and investors are now concerned about the situation in many parts of Thailand. In that report, we mentioned that prices of major agricultural products would spike, including sugar (sugarcane). Indeed, global price of No. 11 raw sugar has surged from a low of 10.76 US cents/lb in September to 14.5 US cents currently (+35.3%) due to fears of supply deficit.

• Action/ Recommendation

Severe weather changes, such as El Nino (dry and low rainfall in northern hemisphere) and La Nina (wet and high rainfall in northern hemisphere), have a large influence on the direction of global agricultural prices through supply disruption/glut. In the last 20 years of weather switches between El Nino and La Nina, sugar price had swung by between +150% and -50%. The NOAA defines 2019 as the second-warmest year since data collection started in 1880 (second to 2015-16 episode of very strong El Nino). Hence, world sugar prices could well rise by at least 50% in the current episode.

Higher sugar prices are good for sugar producers – BRR, KBS, KSL and KTIS. Given rising expectations of a sugar shortage in 2019/20, we expect sugar price to continue to move up and benefit sugar producers such as KSL. In the episode of very strong El Nino in 2015-16, the surge in sugar prices had boosted profitability of Thai sugar producers, and subsequently, their share prices. In the near-term, there are opportunities to speculate on Thai sugar producers as proxies for global sugar prices.

The key risk to this thesis is that Brazilian sugar and ethanol producers can switch between sugarcane => ethanol and sugarcane => sugar. They might find it more profitable to switch to the latter when world sugar prices rise.