The Rise Of Electric Vehicles Spells Trouble For Sugar

The Rise Of Electric Vehicles Spells Trouble For Sugar
Reda Farran, CFA

over 2 years ago4 mins

  • Brazil is set to flood the world market with sugar as the transition to EVs displaces demand for ethanol.

  • Sugar is already contending with declining demand, and increasing supply will lead to falling sugar prices.

  • You can profit from this by shorting sugar ETFs and shares in sugar producers, or by buying shares of food makers specializing in confectioneries and sweetened goods.

Brazil is set to flood the world market with sugar as the transition to EVs displaces demand for ethanol.

Sugar is already contending with declining demand, and increasing supply will lead to falling sugar prices.

You can profit from this by shorting sugar ETFs and shares in sugar producers, or by buying shares of food makers specializing in confectioneries and sweetened goods.

The US president recently called for half of all vehicles sold in the country to be electric or plug-in hybrid by 2030. It’s no surprise that this will impact oil – but the rise of electric vehicles (EVs) will also spell bad news for another, often overlooked commodity: sugar. And that’s an opportunity for you to generate sweet, sweet profit. Here’s how.

How will EVs impact the sugar market?

About 80% of the world's sugar is produced by milling sugarcane, and Brazil is both the largest grower and miller of the crop. But it’s not all saccharine: Brazilian millers use sugarcane to produce ethanol too – a biofuel widely used in American and Brazilian cars. Ethanol’s been used as a fuel since at least the 1970s, but demand really picked up after the 2000s – when the auto industry started making flex-fuel cars that can run on ethanol alone or a blend of ethanol and gasoline. Today, nearly all of the gasoline sold in the US is about 10% ethanol by volume.

But demand for gasoline – and, by extension, ethanol – is set to fall as EV penetration increases. That’s especially true in the US given the president’s new EV goal: the country is, after all, the largest consumer of ethanol. According to a study by the former chief operating officer of sugar trading giant Alvean, demand for ethanol will start declining in 2025 and could fall 40% over the next ten years in the worst-case scenario.

That’s bad news for Brazilian millers: depending on the year, ethanol can account for more than 50% of all sugarcane milled in the country. But will falling ethanol demand, they’ll be left with little alternative but to make sugar, in turn flooding the world’s market for the sticky commodity. The graph below, taken from the same study, shows possible scenarios for sugar production in Brazil. To put these numbers in perspective, the total volume of sugar produced globally in 2020 was around 193 million tons.

Projected scenarios for sugar production in Brazil. Source: Bloomberg
Projected scenarios for sugar production in Brazil. Source: Bloomberg

What’s the opportunity here?

Sugar is already contending with declining demand as health-conscious consumers shun the sweetener. And increasing EV adoption will lead to a huge supply increase coming out of Brazil. What happens when you couple increasing supply for a commodity with declining demand? Falling prices.

The straightforward way to play this is to short sugar. Like most other globally traded commodities, there are futures contracts linked to the price of sugar that you can short. But futures come with a lot of risk due to their inherently high leverage, so I’d actually avoid this approach: you could lose a lot of money should sugar prices rise.

Instead, you could short ETFs that track the price of sugar. There are currently two on offer in America: SGG and CANE. Of the two, CANE is more liquid – that is, it has higher trading volumes on an average day and is therefore easier to trade.

You could also short shares of big sugar-producing companies – lower prices would naturally translate to falling revenues and profits. Again, you have two options. First is Brazil’s Cosan – one of the world's largest millers of sugarcane, as well as the largest ethanol producer in Brazil. The company’s stock is listed on both Brazilian and American stock exchanges. Second is Germany’s Südzucker (stock ticker: SZU) – the largest sugar producer in the world, with an annual production of around 5 million tons.

If you’re not a fan of shorting, there are stocks you could buy as an alternative: food makers, particularly those specializing in confectioneries and sweetened goods, stand to benefit from falling sugar prices. Think companies like Hershey (stock ticker: HSY) and Tootsie Roll Industries (stock ticker: TR).

What are the risks involved?

As always, be aware of the risks associated with any investment opportunity. First, this whole transition to EVs causing Brazilian sugar supply to increase will take a while to play out, so sugar prices could be largely unaffected in the short term. Second, because the price of a stock or ETF can keep on climbing forever, potential losses while shorting are theoretically unlimited. Finally, while confectionery companies stand to benefit from lower sugar prices, there are many other share-price-affecting factors that you’d need to look into: the company’s sales growth, management team, business practices, cash flow, and so on.

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