Weekly Sugar Wrap for 7 January 2022

It has been a turbulent few weeks for sugar. Late November saw the emergence of the Omicron Covid variant which triggered a wide-spread sell-off across most markets with concerns over another global lock-down and the nemesis of all markets – uncertainty. However, early indications suggested the Omicron valiant might be more transmissible but produces lesser symptoms and lower hospitalisation and mortality rates. This saw all market including sugar to recover back to their pre-Omicron levels. However, another macro sell-off was seen shortly before Christmas as the rapid spread of Omicron continued to spook the markets. Sugar followed the rest of the markets lower only finding support as prices approached the previous lows of 18.50. Prices saw another sharp correction in front of the holiday period but only recovered just over half the losses. Since Christmas prices have dropped again but this time fundamental reasons have been the chief reason for the market reaching five month lows. There has been a discernible shift in sentiment, which may have been masked by the Omicron shenanigans earlier in December. Increasing production and prospects coupled with doubts of any major recovery in demand have been the major reasons for prices to drop yesterday to their lowest level since the 5^th August last year.

Two of the largest sugar producers are well into their 2021/22 cane harvests at the moment. Data from both India and Thailand suggest production will be as expected if not higher. As of the end of 2021 India had produced 11.56 million tonnes of sugar up just over 4% from the same period last season according to ISMA. If this trend continues to the end of the season it is reasonable to assume total production could be over 32 million tonnes and, at least, another million tonnes more than forecast before the harvest started. In Thailand where their harvest only started at the beginning of December it is now into top gear. As of the 3^rd January the total amount of cane harvested had reached 17.7 million tonnes which is over 65% higher than the 10.7 million tonnes at the same time last season. Total sugar production had reached 1.7 million tonnes nearly 60% higher year on year. However, one should remember that last season’s total sugar production of around 7.5 million tonnes was the lowest in over a decade due to drought. Nevertheless, it does now look as total production should push over 10 million tonnes.

Brazil’s CS is now in its inter-season period with the next harvest not starting until April. Total production, once all mills have stopped activities for the season, will be only marginally above 32 million tonnes some six million tonnes down on the previous record breaking harvest. The well documented drought was the main culprit for this drop not helped by a couple of frosty nights. However, to the surprise of many, the rains returned in late August and have continued despite La Nina lurking. While she seems to have impacted on Southern Brazilian rainfall she is yet to visit the main CS regions. Rainfall has been widespread and has helped soil moisture levels recover back to normal in most areas and more rain is forecast for the next ten days at least. Now the big question is how this rainfall has impacted on the cane. The drought has, undoubtably, left the cane damaged which will take more than one season to repair. Nevertheless, sugar cane is renowned for its ability to quickly improve if given the right conditions. Indeed some might argue that a period of stress followed by ideal condition can be very beneficial. It is likely that fresh estimates for the 2022/23 season will be published over the next few weeks with the general view that estimates will be at the top end or higher than the 530-570 million tonne range previously pencilled in by analysts.

Demand is the other issue that has concerned the market. It remains muted and with the pandemic still likely to be many months away from its conclusion will remain an area of concern. Some will point to the fact that many end-buyers had delayed re-buying last year and used existing destination stocks as freight rate soared but now they will be forced into replenishing their stocks. This has been done to some extent with India exports plugging supply gaps left by Brazil aided by prices dropping from well over 20.00 cents in November. The much harder question is how much actual consumption has been hit. The pandemic enforced global lock-downs undoubtably hit consumption and, probably, is still having an impact. One aspect of consumption that has not been discussed for a while is the thorny issue of sugar and health. Lost in the turmoil of the pandemic the cutting of sugar content in processed foods, fizzy drinks is likely to have continued and may also weigh on demand.

In late 2020 the possibility of a commodity super-cycle developing was first raised by Goldman Sachs and they have recently released a timely reminder that their view has not changed. Indeed they seem more bullish for commodities and believe the cycle could last for a decade. They see crude prices averaging $85 in the first quarter of this year and may hit $100 in 2023. They are ‘extremely bullish’ on the whole commodity complex. The idea of a commodity super-cycle developing received a lot of press this time last year but enthusiasm diminished during the year with many analysts unconvinced. However, world food prices jumped 28% in 2021 to their highest level in a decade according to the UN’s food agency. While the index eased slightly lower during December it had climbed for the previous four months with all categories in the index showed big increases during last year. The agency’s view is that things are unlikely to change over the coming 12 months although do concede agri-commodities are likely to see increased production as farmers look to take advantage of higher prices. It might be argued this has already begun to happen in sugar so whether it can successfully join any general commodity rally remains to be seen.