Imbalance between supply and demand drives sugar… | tutor2u Economics

Imbalance between supply and demand drives sugar prices to 28 year high

There is plenty of coverage today of the news that the global price of raw sugar has increased to its highest level since March 1981 on the back of a widening imbalance between world supply and demand.

The hike in sugar prices is a classic market response to a rise in demand for sugar - especially in countries such as Brazil where a growing volume is being used as a (subsidised) source of ethanol - combined with supply shortages caused by low rainfall during the monsoon season in India and China and hail and drought affecting supplies from Russia.

Sugar output in India has contracted by more than 45% over the last year and the country is on the point of moving from being a net exporter to a net importer of sugar if measures are taken to limit existing exports to maintain sufficient supplies for the home economy. Global sugar demand will exceed output by as much as 5 million tons in the year through September 2010, according to the International Sugar Organization in London.

When demand exceeds supply, existing stocks fall and this is a key factor driving prices higher. Speculators can cause the price movements to be exaggerated as they trade in the forward markets to buy up available stocks in the expectation of further price increases.

Independent: Chasing a sugar rush: global deficit drives price rises

Telegraph: Sugar price hits 28-year high

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