Sugar Prices Go Crazy When the Monsoon Fails

Sugar is one of those things you never think about. You put it in your coffee, you eat it in everything, it is just there. Then one summer in India the rain does not come, and suddenly sugar is front page news. Chapter 33 of Torsten Dennin’s “From Tulips to Bitcoins” (ISBN: 978-1-63299-227-7) tells the story of what happened in 2009 and 2010, when the world’s second-largest sugar producer ran out of sugar and had to start buying it from everyone else.

The Monsoon That Never Came

India depends on the monsoon. Every year from June to September, seasonal rains sweep across the country and water everything. Crops, rivers, reservoirs. The entire agricultural cycle is built around those four months of rain.

In June 2009, the rain did not come. It was the driest summer month in India in over 80 years. The cause was El Nino, the same Pacific Ocean weather pattern that dried out Australia in the wheat story from Chapter 27. This time El Nino practically shut down the Indian monsoon.

When your farming calendar revolves around one rainy season and that season fails, everything falls apart fast.

India’s Sugar Problem

India is the world’s second-largest sugar producer, behind Brazil. In a normal year, India produces over 26 million metric tons of sugar. That is about 14% of the world’s total supply. The country normally exports sugar. It is a net exporter. That is the baseline everyone plans around.

The drought hit sugar-growing regions hard, especially Uttar Pradesh, one of India’s most important agricultural states. Crop failures were severe. The harvest estimates kept getting revised downward. First from 26 million tons to 17 million. Then from 17 million to 15 million. That is a drop of more than 40% from the previous year.

India went from a net exporter to a net importer of sugar. The second-largest producer in the world was now competing with everyone else for supply. That is the kind of shift that breaks a market.

Why Sugar Markets Are Fragile

Here is something most people do not realize about sugar. Only about 25% of the world’s sugar production is available for international trade. The rest gets consumed domestically in the countries that produce it. That is a very thin market.

Three quarters of the world’s sugar comes from sugarcane, which grows in tropical and subtropical regions. The rest comes from sugar beets, mostly in Europe and Russia. The big producers are Brazil, India, China (about 6% of world supply), and the United States (about 5%).

Brazil dominates. It is the largest producer and the largest exporter. About 40% of all internationally traded sugar comes from Brazil alone. And here is the twist: over half of Brazil’s sugar harvest does not become sugar at all. It gets processed into ethanol for fuel. So the amount of Brazilian sugar that actually reaches the world market as sugar is smaller than the raw production numbers suggest.

Sugar trades as Sugar No. 11 on the New York Board of Trade, ticker symbol SB. Each contract covers about 50 metric tons, or 112,000 pounds. It is one of the most volatile commodity markets in history.

A History of Wild Price Swings

Dennin includes the price history, and it reads like a roller coaster designed by someone who hates you. In 1967, sugar traded at 1 cent per pound. Then in the mid-1970s it spiked above 60 cents. Then it collapsed. By 2004, sugar was below 6 cents per pound.

That kind of volatility, from 1 cent to 60 cents and back down to 6 cents, tells you everything about how thin and weather-dependent this market is. A few bad harvests in the right places, and the whole pricing structure goes out the window.

Brazil Cannot Help This Time

Normally when one big producer stumbles, other producers pick up the slack. But 2009 was not a normal year. Brazil, which supplies about 16% of the world’s sugar, had the opposite weather problem. Too much rain. Heavy rainfall in 2009 disrupted the Brazilian harvest.

So at the exact moment India needed to import millions of tons of sugar, Brazil was having its own production troubles. The market that supplies 40% of internationally traded sugar could not ramp up to fill the gap.

When the biggest exporter has problems at the same time the second-biggest producer goes from exporter to importer, prices do what prices do. They go up. Fast.

The 28-Year High

On January 29, 2010, sugar closed at 29.90 cents per pound. That was a 28-year high. To put that in context, it was a 150% premium over where sugar had traded a year earlier. And it was a 500% increase from the lows of 2004.

Five hundred percent. From a drought in India and too much rain in Brazil.

The market stayed tense through February. But the situation started to calm down after the March futures contracts expired on February 26, 2010. Positive harvest data from Brazil signaled that the worst of the scarcity was passing. Brazil’s next crop was coming in better than feared, and the market started to breathe again.

What Stays With Me

This chapter connects directly to the wheat story in Chapter 27 and the rice story in Chapter 30. Same pattern: a major producing country gets hit by weather, a thinly traded market cannot absorb the shock, and prices go vertical. Australia’s drought tripled wheat. The rice crisis quadrupled rice. India’s drought pushed sugar up 500% from its recent lows.

The detail that sticks with me is how concentrated the sugar trade is. Only 25% of production reaches the global market. And 40% of that comes from one country, Brazil. So effectively, the international sugar supply depends heavily on what happens in two countries. When both of them have bad years at the same time, there is almost no cushion.

The other thing worth thinking about is the ethanol connection. Over half of Brazil’s sugar goes into fuel, not food. That means the sugar market is not just competing with weather. It is competing with energy policy. Every ton of sugarcane that becomes ethanol is a ton that does not become sugar on the world market. When supply gets tight, that choice between fuel and food becomes a very real tradeoff.

El Nino shows up again and again in this book. It dried out Australia for wheat. It shut down India’s monsoon for sugar. Each time, the same weather pattern creates a different commodity crisis in a different part of the world. But the market mechanics are identical: concentrated supply, thin international trade, a weather shock, and then prices that move in ways nobody predicted.

The farmers in Uttar Pradesh waiting for rain that never came were not thinking about futures contracts on the New York Board of Trade. They were watching the sky. The traders in New York were watching the same sky, but from a very different angle. Both were waiting for the monsoon. And when it did not come, both paid the price.

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