Raw sugar prices spiked to their highest level in 16 months Thursday, as supply concerns outweighed Britain’s recent Budget announcement making it one of the first countries to introduce a sugar tax on soft drinks.
Raw sugar for May delivery surged 3.4% to $15.99 on the ICE Futures US exchange Thursday, its highest settlement since November 25, 2014. The move culminated an eventful 48 hours for the soft commodity, which became the centre of attention after UK Chancellor George Osborne announced a new tax on sugary drinks.
“I am not prepared to look back at my time here in this Parliament, doing this job and say to my children’s generation, ‘I’m sorry. We knew there was a problem with sugary drinks. We knew it caused disease. But we ducked the difficult decisions and we did nothing,” Mr. Osborne said in his controversial Budget announcement Wednesday.
The proposed tax, which will be introduced in April 2018, is expected to generate an additional £11 billion in revenues by 2020. For Mr. Osborne’s Conservatives, the decision was “one that takes bold decisions so that our children will grow up fit and healthy.”
The commodities market was on high alert Wednesday morning, as Mr. Osborne and the Office for Budget Responsibility (OBR) had been rumoured to be considering a new tax levy. Sugar futures experienced heavy volatility Wednesday before turning higher toward the end of the day. They would resume their uptrend on Thursday, joining a broader commodities rally that was triggered by a dovish Federal Reserve.
Tate and Lyle
However, not everyone was let off the hook. Tate and Lyle plc, a British-based agribusiness that is listed on the London Stock Exchange, tumbled immediately after Mr. Osborne mentioned the controversial tax levy. Share prices plunged 2% in about six minutes before staging a modest recovery later on in the session. Share prices fell again Thursday, perhaps in belated response to the Budget announcement that has many investors wondering about the implications on sugar producers and businesses that sell soft drinks and other sugary products.
The sudden drop in its share price would have been understandable had Tate and Lyle actually owned a sugar business. However, the agribusiness company hasn’t been in the sugar industry since 2010 when it sold its sugar refining business to an American company.
Soft Drink Makers Respond
Coca-Cola and other soft drink makers criticized the British government’s proposed tax, warning that it will not reduce obesity or promote health.
“We don’t believe the sugar tax is the right thing to be done,” said Leendert Den Hollander, vice president and general manager of Coca-Cola’s UK operations. “We are not debating the issue, we are debating the solution. The facts don’t suggest that a sugar tax works to change behaviour.”
He added, “We know this is one of the mechanics and solutions that people think will help deal with the issue of obesity, at least from a government perspective, but there is no evidence to suggest that this will reduce obesity.”
Soft drink makers Nichols and Britvic also issued public statements panning the tax.
Supply Constraints Outweigh Budget Fears
Despite initial fears that a British sugar levy would reduce consumption, underlying concerns over a supply shortage continues to drive up prices. Several sugar producing states have reported a slowdown in output, including India, Thailand and China. Brazil, which is the top sugar producer in the world, is also expected to see weaker demand for the soft commodity due to the recent strength of its local currency, the real.
Brazil’s currency has strengthened in recent weeks amid hopes that a change of government would help lift the country out of a devastating recession. The real is the best performing currency in the world over the past four weeks.
Trading Sugar
Sugar futures can be bought and sold on the open market like any other soft commodity. They are subject to the same forces of supply and demand and technical and fundamental analysis that drive the rest of the commodities market. One of the best ways to trade sugar is through the CFD market, which ensures that differences in settlement can be made in cash payments rather than delivery of the physical product (after all, it wouldn’t be practical to buy and sell pounds of sugar on the open market).
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