Global Sugar View by McDougall – Episode 10


Energy, the other part of the sugar equation

New York sugar had a quiet week until Friday, when Petrobras finally made a move on repricing local gasoline prices. They had been holding back as global energy prices continued their seven week rally. Petrobras last raised gasoline prices on August 12th. The gasoline import parity over that time went from negative 5% to exceed negative 17%. There was concern from the sugar and ethanol sector of Brazil that if Petrobras had not made a move on Friday, then we could be seeing a repeat of 2011-2016 when Petrobras (The Brazilian government) froze gasoline prices. Perhaps the rally by November WTI crude briefly above $80 a barrel tipped their hand. A “stop loss” as it were.

The question now is “could we see energy prices rally further?”
The energy “crisis” as it were is both the fruit of the pandemic, but also of China’s push for cleaning up its energy matrix.

The pandemic caused crude, gasoline and energy prices to fall as economic activity slowed. Prices have recovered but investment is still down from pre-pandemic times. The pullback in investment is now being limited by concerns for the future of fossil fuels. Everyone knows that wind, solar and the push for electrically powered vehicles (EVs) is THE thing, but how each country transitions is largely up in the air. But now that there is more quantifying the damage extreme weather (global warming) is causing, there is a wave of avoidance in fossil fuel investments that big banks and some governments are willing to do.
Given the pace of investment in “green energy” which is haphazard at best globally, this will lead to a tumultuous transition period.

Perhaps the upcoming Paris Accord 2, otherwise known as COP 26, in November will be able to provide more of a blueprint for an energy transition, but we also know that promises from the countries participating are cheap, and most, if not all are just saying when they go to net zero and not how they plan to get there. Most of the countries are treating energy as an all or nothing equation. Midpoint like coal to gas or gasoline to biofuels are not being properly considered.

Nat gas is 50% less CO2 than coal, biofuels, depending on the mix, are also a vast improvement over gasoline. We are already seeing the difficulty China is having in its transition out of coal (50-70%) to renewables (27%) and gas (10%). The push to alternatives is not keeping up with their economic growth, so they are having to unwind their pullback in coal in a big way to avoid any further blackouts and energy rationing.

Globally the big push to gas as well could lead to backsliding as well into crude and coal. We haven’t even talked about the limiting factor for renewables which is enough battery capacity to account for the on and off nature of wind and sun.

The difficulty in the global energy transition has been put on display given the economic growth spurt as the pandemic eases. This transition period takes 10-25 years for most countries. Biofuels can help with the transition, but we are already hearing the grumbling increase as food prices rise. The FAO food index reached its highest level in ten years and the energy price rise will only add more to the price pressure. But ethanol from sugarcane which makes sugar should certainly be less troublesome than ethanol from corn and wheat.

If sugar prices rise, that is a problem, if corn prices rise, that means higher animal protein prices, but if wheat prices rise, that leads to riots and regime change. Make your choice, but energy from fossil fuels is dirty, renewables will take time. Ethanol from cane is clean, uses existing delivery infrastructure and the technology is already here. A clear choice.

To read the previous Episodes, click here

Mr. Michael McDougall is Managing Director at Paragon Global Markets, LLC, New York, USA. He has been active in commodity futures for 35 years.


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