Weaker BRLUSD overrides high ethanol demand

Sugar price has extended its losses to trade past the psychological level of $19.00 cents per pound to $18.72 as at 11:36 a.m GMT. A weaker Brazilian Real is the key bearish driver in the market. Even so, high ethanol demand may sustain the ICE futures above the support level of $18.29 in the short term.

Brazilian Real’s value

The Brazilian Real has continued to weaken against the US dollar; an aspect that is weighing on sugar price. Indeed, the strength of this emerging market currency  usually has a correlation to the commodity’s price.

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Similar to other commodities, sugar is priced in US dollars. At the same time, production costs are usually computed in Brazilian real. When the Real is on a decline, producers in Brazil incur lower production costs. At the same time, the commodity is in a position to fetch more in terms of US dollars.

In May 2020, the Real was at record low of 0.1674. During the same period, sugar price dropped to a 13-year low at $9.05 cents per pound. More recently, the Real rallied to a two-year high of 0.2176; boosting ICE futures to a 5-month high of $20.53 cents.

As at the time of writing, BRLUSD was at $0.1963. With the Fed interest rate decision in focus, the Real will likely remain under pressure in the short term. From this perspective, I expect sugar price to remain below the crucial support-turn-resistance level of $19.25 cents per pound in the ensuing sessions.

Ethanol demand

Even with the bearish driver that has been curbing sugar price’s upward potential, it is finding support in the high demand for ethanol.  The alternative fuel has had its demand surge in recent months amid the soaring crude oil prices. As at the time of writing, Brent futures- the benchmark for global oil – was at $106.40 per barrel. Notably, the psychological zone of $100, which had been evasive since 2014, has been a steady support level the Russia-Ukraine war began in late February.

While US ethanol is corn-based, Brazil’s product is largely sugar-based. What’s more, the South American nation is the second-largest producer of ethanol after the United States. With this in mind, the surge in crude oil prices and subsequent rise in ethanol demand will continue to offer support to sugar price.