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Sweet nothings

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imageLONDON: Physical differentials for Asian white sugar have held up despite a sharp rally in futures to multi-year highs, indicating that Chinese-led demand remains buoyant.
However, traders spoke of an increase in discounts on EU white sugar since last week's rally.
They ruled out any prospect for global demand destruction due to growing consumption. Most-active raw sugar futures surged to a 3-1/2-year high of 21.22 cents a lb on Thursday, driven by a shift of the global market into deficit.
"I don't believe in demand elasticity for sugar," one senior physical trader said, referring to a proliferation of long-term contracts between suppliers and end consumers.
"I believe in income elasticity: when incomes decline, people buy less." The trader said the resilience in cash differentials and the sturdy white sugar premium signalled firm Chinese demand for refined sugar. Myanmar and other neighbouring countries are believed to be gateways for smuggling of white sugar into China.

China is the world's top sugar buyer.

Traders also referred to tight availability of Indian and Thai white sugar.

The July/August white sugar premium was quoted on Friday at $106-$108 a tonne, a comfortable level of refining profitability. The US softs markets were shut on Monday for Independence Day.

Another senior trade source said that since the rally in sugar futures, physical discounts for white sugar had edged up, indicating that demand may have slipped for refined sugar from so-called toll refiners. Such refiners import raw sugar and process it into the refined product.

"Toll refining is slowing down because of the discounts people have to give to sell white sugar to physical buyers," the second trade source said. "Differentials are holding up reasonably despite a rally in raw sugar futures from some 16 to 20/21 cents per lb," the source added.

The trade source said this suggested that stocks were lower than previously thought despite several years of surpluses.

Broker Marex Spectron said the whites market was expected to remain tight until the lifting of output quotas in the EU in October 2017, after which a surplus would emerge but probably not enough to rebuild stocks substantially.

Question 1

(a) Define Income elasticity of demand      [2 Marks]

(b) Using a diagram explain whether sugar is a normal good or an inferior good [4 Marks]

(c) Using information from the article and your knowledge of economics discuss whether sugar prices are likely to rise or fall  in the near future [8 Marks]

Copyright Reuters, 2016