Will the AUD spoil the sugar party?

Simon Hood

Wilmar Manager Grower Marketing

Not surprisingly we spend a lot of time analysing and talking about the sugar market fundamentals. How

is the crush going in Brazil? What is the status of the monsoon in India? Where is ethanol parity? What is

the premium of white sugar over raw?

All this type of analysis, across a range of participants from around the globe, is concentrated into the

ICE #11 sugar contract which forms the basis of price determination for global trade. This price is quoted

in US cents per pound. For Australian cane growers, we convert this back to AUD tonnes of sugar for

pricing purposes, using the AUD/USD exchange rate.

The meteoric rise in prices this year has been a combination of a high #11 price on tight global sugar

supplies, but also a weak AUD relative to the USD. Determining the direction and factors that drive the

short and long term movements in the AUD is an inexact science. Nevertheless significant financial

resources are dedicated to forecasting where the AUD will be trading in the next day, week or year.

There are some fundamental factors that will correlate with movements. A significant factor that has

contributed to the weak AUD has been the relative level of interest rates between Australia and the US.

AUD rates are lower than US which means less demand for AUD from global investors and a weaker

AUD.

The surprise softening of the US inflation numbers recently caused a 1.5c jump in the AUD. This reaction

was based on the revised expectation that the next movement in US interest rates will be down and

potentially more demand for AUD relative to USD.

As a large trading nation, our currency is often linked to the movements in commodity prices. While

agricultural products are an important export earner, it is coal and iron ore that dominant export income

and provide the basis for buying AUD against USD export receipts. If commodity prices are expected to

strengthen this will support a higher AUD.

Then there are the less specific factors that cause the AUD to move. These are more sentiment driven

market factors. When a war breaks out there is usually a flight of global investment to the USD as a safe

haven currency. If there is an expected stimulus package from China the AUD will tend to rally as this will

be good for commodity prices.

From the attached chart we can see the AUD has been trading below 65 cents for some time which has

significantly helped Australian sugar prices. If the US rate tightening cycle is over and Australia’s isn’t; if

we see a continued strength in steel and energy prices; if China announces a significant stimulus

package, then we could see the AUD significantly higher. Lots of “ifs”, but something to keep an eye on

for Australian sugar prices.

If you’d like to know more, please contact our Grower Marketing consultants, Meghan Wilson on 0437

669 118 or Fiona Villis on 0437 297 978.

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